Bartol v. Walton & Whann Co., 169.

• Decision Date: 17 February 1899
• Docket Number: 169.
• Citation: 92 F. 13
• Parties: BARTOL v. WALTON & WHANN CO. et al.
• Court: U.S. District Court — District of Delaware

92 F. 13

BARTOL v. WALTON & WHANN CO. et al.

No. 169.

United States Circuit Court, D. Delaware.

February 17, 1899

Charles G. Rumford and James W. M. Newlin, for complainant.

Lewis C. Vandegrift and Arthur W. Spruance, for defendants.

DALLAS Circuit Judge.

On June 27, 1892, the complainant purchased, in his own right, 100 shares, and, as trustee, 10 shares, of the preferred stock of the Walton & Whann Company, a Delaware corporation, party defendant. About three months prior to this purchase a prospectus had been issued by a firm of bankers, who were the agents of the Walton & Whann Company in that behalf. The bill charges that:

'This prospectus, for the purpose of fraudulently inducing your orator and others to buy the preferred stock of the Walton & Whann Company, made certain material representations as to the financial condition of the Walton & Whann Company which your orator has since discovered to have been false and which he charges were then known by the officers of said Walton & Whann Company to be false.'

It further charges that:

'The plan outlines by the said prospectus required that the whole contemplated issue of preferred stock, viz. $300,000, should, in good faith, be subscribed and paid for before any of it would be issued to purchasers thereof, and your orator subscribed for and paid for said stock in reliance upon his belief that thereby the said company would, simultaneously with his subscription, receive new cash capital amounting to $300,000; and this consideration, together with the alleged financial condition of said Walton & Whann Company, set forth in said prospectus of March 24, 1892, were the reasons which induced him to purchase said one hundred and ten shares of its preferred stock.'

The bill prays:

'First, that his subscriptions, individually and as trustee, for said one hundred and ten shares of stock, be declared void, as having been procured by fraud on the part of the said Walton & Whann Company; second, that your orator individually be declared a creditor of the Walton & Whann Company for the sum of $10,000, with interest from June 27, 1892, and that your orator, as trustee, be declared a creditor of said company for $1,000, with interest from June 27, 1892;' third, for process; and, fourth, for general relief.

From the preceding statement, it appears that the object of the suit is to obtain a decree annulling the complainant's subscriptions for the stock in question, 'as having been procured by fraud,' and for restitution of the money paid by him in pursuance thereof. The bill is founded solely upon the ground of fraud, and such a bill must always be specific. It is not enough to charge fraud in general terms. The facts constituting the fraud must be stated. Brooks v. O'Hara, 8 Fed. 529-532; Patton v. Taylor, 7 How. 132-159; Very v. Levy, 13 How. 345-361; Noonan v. Lee, 2 Black, 499-508; Voorhees v. Bonesteel, 16 Wall. 16-29. The pleader, in drafting this bill, did not overlook this requirement. He embodied in it a copy of the prospectus, which the plaintiff avers 'induced him to purchase,' and it specifies the particulars in which that prospectus is alleged to have been false, and these specifications I will consider after some principles of law which seem to be generally pertinent shall have been briefly adverted to. To maintain a suit for the rescission of a subscription to stock, as having been induced by misrepresentation, it must be alleged and proved, not only that the representation was false, but also that the defendant made it 'knowing it to be false, or with such conscious ignorance of its truth as to be equivalent to a falsehood. ' 'The scienter must not only be alleged, but proved. ' Griswold v. Gebbie, 126 Pa.St. 353-362, 17 A. 673. Fraud consists in intention, and that intention is a fact which must be pleaded, either by an express averment or by such words as necessarily imply such intent. Moss v. Riddle, 5 Cranch, 351-357; Brooks v. O'Hara, 8 Fed. 529-432. Fraudulent intent may, of course, be found upon proof of a false statement of fact made as of the party's own knowledge, but not (if an actual intent to deceive be not shown) where the matter stated was only of opinion, estimate, or judgment, unless such statement was based, by the person making it, upon his assertion of some fact which he knew to be false, or of the truth of which he was so ignorant as to make his assertion of it equally culpable. In short, there must be a false statement of fact, made with fraudulent intent, which, being believed and acted upon, causes damage.

The bill sets forth that the financial condition of the Walton & Whann Company was stated in the prospectus as follows:

'Statement.

'At the instance of Messrs. Elliot, Johnson & Co., Messrs. Heins & Whelen, public accountants and auditors, of No. 508 Walnut street, Philadelphia, have thoroughly examined the books and accounts of the Walton & Whann Co. and its associated companies. Their detailed statements can be seen at the office of Elliot, Johnson & Co., Wilmington, Delaware. Letters from most prominent banks and bankers, recommending Heins & Whelen for this purpose, can also be seen there. These statements show an excess of assets over liabilities of $412,000. Valuations of assets were tested and borne out by appraisements of the Wilmington plant by Job H. Jackson, Esq., of Jackson & Sharp Co.; Thomas H. Savery, Esq., of Pusey & Jones Co.; Alfred D. Poole, Esq., of J. Morton Poole Co.; and by bids received for the shares of the Etiwan Phosphate Company and Keystone Chemical Co.,-- all of which can be examined upon application. The stockholders of the present company here agreed to guaranty the payment of all bills receivable and debts due, as carried over in the statements above referred to. No estimate of value has been made, and no charge included, for good will, patents, trade-marks, etc., which company owns. The stockholders of the present company receive, of the above capitalization, in lieu of their present holdings, all of the 4,000 ($400,000 par value) general stock, and 120 shares ($12,000 par value) of the preferred stock. The $288,000 preferred stock is issued to take up present liabilities, and, when issued, will increase the above $412,000 excess of assets over liabilities that much, or to about $700,000.

'June 23, 1892. Elliot, Johnson & Co.

'Mr. Ephraim T. Walton and Mr. Francis N. Buck have agreed not to engage or become interested in the business of manufacturing or selling fertilizers, chemicals, etc., or any similar business, during the continuance of the said Walton & Whann Company, in any part of the United States in which the said company is now carrying on said business, and to serve the said Walton & Whann Co. to the best of their ability, for a term of ten years.'

In the prospectus of March 24, 1892, it is further stated, viz.:

'Certificate of Earnings.

'Philadelphia, Pa., March 14, 1892.

'Messrs. Elliot, Johnson & Co., Wilmington, Del.-- Gentlemen: We have examined the books and accounts of Walton & Whann Co. for the three years ending October 31, 1891, of the Etiwan Phosphate Co. for the three years ending May 31, 1891, and of the Keystone Chemical Co. of New Jersey for the three years ending December 31, 1891, and found the profits of the Walton & Whann Co., and of its interests in the said other two companies, after providing for the cost of all materials, wages, bad debts, expenses, renewal and repairs to plant and machinery, to have averaged, for the said three years, $77,436.68; and for the last year of the three, $75,466.63. Allowing a saving of interest of $20,625.00 per annum, which the proposed new capital would yield, the profits, in lieu of those above mentioned, would be: For the three years, $98,061.68; and for the last year, $96,091.63.

'Very respectfully yours, (Signed) Heins & Whelen.'

It is not alleged that any misrepresentation was contained in any part of the prospectus other than that above extracted; but it is averred that this part was false in three particulars, and these enumerated particulars will now be separately dealt with, but not in the order in which they are set out in the bill.

1. It is alleged that the prospectus was false in that 'the company failed to secure bona fide subscriptions for all the preferred stock'; and this allegation appears to be based upon the preceding one, 'that the plan outlined by the said prospectus required that the whole contemplated issue of preferred stock, viz. $300,000, should, in good faith, be subscribed and paid for before any of it could be issued to purchasers thereof.' It is not, and could not be, alleged that the prospectus expressly stated anything of this sort and all that is asserted, it will be observed, is that the plan which it outlined required that the whole issue should be subscribed, etc. This is not an allegation of a representation of existing fact, but, at the utmost, of a promise merely; and therefore, though, possibly, a claim of contractual liability might have been founded upon it, it certainly cannot support the charge of fraud, which is the gist of the present complaint. But it is not true that the prospectus outlined any plan from which even an agreement could be inferred that none of the preferred stock would be issued until all of it had been subscribed and paid for. It may be that such was the complainant's anticipation (he has testified that he so 'understood' or 'assumed'), but anticipation is one thing, and contract is another, and a very different, thing. The prospectus contains nothing whatever to indicate any mutual understanding to that effect, but, on the contrary, it refers to 'all shares issued,' and to 'outstanding preferred shares,' in a way which would be...