Champion Funding & Foundry Co. v. Heskett

• Decision Date: 03 June 1907
• Citation: 125 Mo. App. 516,102 S.W. 1050
• Court: Missouri Court of Appeals
• Parties: CHAMPION FUNDING & FOUNDRY CO. v. HESKETT.

102 S.W. 1050

125 Mo. A. 516

CHAMPION FUNDING & FOUNDRY CO. v. HESKETT.

Kansas City Court of Appeals. Missouri.

June 3, 1907.

1. BILLS AND NOTES—VALIDITY—FRAUD.

Before a maker can defeat recovery upon notes on the ground that they were procured by fraud, he must prove that false representations of material facts were made to him, that he believed them to be true; that his reliance on them was an act of ordinary prudence; and that they influenced his action.

2. SALES — FRAUDULENT REPRESENTATIONS — ELEMENTS.

Not only must a representation be untrue when made, but it must be uttered by the vendor either with the intent to knowingly deceive the purchaser to his damage, or under circumstances that show it was recklessly made.

3. SAME—CAVEAT EMPTOR.

Where the purchaser knows the facts, or may know them by the exercise of ordinary prudence, he must form his own opinions and act on his own judgment.

4. SAME—OPINION AS TO VALUE, STATEMENT OF MATERIAL FACT.

Where the vendor knows that the vendee is so situated that his opportunity to learn the actual facts from which an opinion may be formed does not place him on even ground with the vendor, the expression of an opinion as to value becomes the statement of a material fact.

5. BILLS AND NOTES—ACTIONS—DEFENSES— FRAUD.

In an action on notes, evidence examined, and held insufficient to show that the defendant was deceived into giving the notes by the false and fraudulent representations of the payee.

6. SAME — TRANSACTION AGAINST PUBLIC POLICY—CANCELLATION OF NOTES.

Where notes were given as a part of a scheme to defraud the public, the court may, upon an action being brought upon them by the payee, order their cancellation.

7. SAME.

Where notes were given as a part of a scheme to defraud the public, the fact that in suing on them at law it was not necessary to bring in the illegal transaction in order to make out a prima facie case did not deprive the defendant of his equitable right to have the notes canceled.

8. SAME.

In an action on notes given as a part of a scheme to defraud the public, it was not a prerequisite to defendant's right to have them canceled that he return what he had received as a consideration for them.

Appeal from Circuit Court, Cole County; Wm. H. Martin, Judge.

Action by the Champion Funding & Foundry Company against J. W. Heskett. From a judgment for defendant, plaintiff appeals. Affirmed.

W. S. Pope, for appellant. Silver & Brown, for respondent.

JOHNSON, J.

Action to recover judgment on three promissory notes executed by defendant. In the answer, defendant admitted the execution and delivery of the notes, but alleges they were procured by fraud, and prays for their cancellation and for other equitable relief, the nature of which will be disclosed in the statement of the facts of the case. The learned trial judge, sitting as a chancellor, heard the evidence, found the issues in favor of defendant and entered judgment accordingly, from which plaintiff appealed.

The facts pertinent to the issues raised by the pleadings are somewhat involved; but must be fully stated in order to discuss intelligently the questions of law presented.

In February, 1903, Archie H. Rife, of Dallas City, Ill., the inventor of a certain type of carburetor, obtained United States letters patent covering his invention, and in July of the same year duly assigned the same to the Champion Funding Company, a corporation organized under the laws of Iowa for the purpose of selling territorial rights to vend the device. The stockholders contributed $5,000 in cash to the capital stock, and the company sold some county rights realizing proceeds that brought its net assets, exclusive of the value of the patent, to about $11,000. The sales were made with the agreement on the part of the company that, when it should become possessed of funds to the amount of $50,000, it would erect a suitable factory and proceed to manufacture the device to supply the demands of those who had purchased county rights. Without waiting for the consummation of this purpose and with affairs in the condition stated, its five stockholders, who owned all of the capital stock, concluded to form a new corporation to conduct the business on a different plan from that being pursued. Accordingly, on the 14th day of January, 1904, these stockholders succeeded in incorporating the present company under the laws of Arizona with an authorized capital stock of $650,000, which was distributed as follows: $300,000 was given to the five stockholders of the old company in consideration of the assignment and transfer to the new company of the "patents and improvements, patent rights, unsold territory, factory site, office equipment, business, copyrights, and moneys in bank" owned by the old company; $50,000 was set aside for the re-purchase by the new company of certain territorial rights, which had been sold; and the remaining $300,000 was placed in the treasury for the purpose of being sold to raise funds for the uses of the corporation. The $300,000 of stock given in purchase of the assets of the old company was divided in this manner: The assets transferred by the old to the new company (exclusive of the patent), which, as stated, amounted to $11,000, were deemed to have paid for $150,000 of this stock, and each of the five stockholders in the old company received $30,000 as his share thereof, for which he was accounted to have paid the sum of $2,200. The remaining $150,000 of this stock was divided into five portions of $30,000 each, and it was proposed to sell each portion to some person whom the five original stockholders desired to have associated with them in the control of the corporation at the price of $2,200 cash for each portion, so that the corporation would be controlled by a board of 10 members, each of whom would own $30,000 of stock, for which he would have paid $2,200. The proceeds to be derived from sales of such portions were to go into the treasury of the company, so that, in effect, the members of the old concern received $150,000 in stock of the new corporation for all of the assets transferred, including the patent, and the remainder of the stock was to be sold for the benefit of the corporation.

A novel plan was adopted for the sale of the treasury stock, which, as stated, amounted to $300,000, and from which the directors expected to derive the means to further the enterprise. This stock was divided into portions of five shares each; the par value of a share being $100. Each stock purchaser was required to buy a certificate for one of these portions at the price of $500, the par value of the shares, and, in addition, was required to buy the right to vend the carburetor in two counties, for which he must pay the sum of $1,000. His purchase of stock and county rights entitled him to receive appointment as an agent of the company for the sale of stock and county rights to others, and for each sale he might make in his own or any unsold territory he was to receive a commission of $500, and for each one made in territory sold to another he was to have a commission of $400, and $100 was to be paid to the owner of the territory. All sales were to be made on exactly the same terms; that is, each purchaser was to buy five shares of stock, two county rights, and an agency, for which he was to pay the gross sum of $1,500. Agents were not expected to close sales. They were provided by the company with pamphlets, circulars, and other printed "literature" extolling in superlative language the merits of the carburetor, and with "cards of introduction" to the president of the company. Armed with these, they were to endeavor to persuade those who were worth $1,500 or more to go to the principal office of the company at Burlington, Iowa, and investigate for themselves, and, as an inducement, the company, on being advised by an agent of the contemplated visit of a prospective purchaser of the requisite qualification, sent the latter money to pay his railroad fare and agreed to defray his hotel bill while in Burlington. The introduction card presented by the visitor, which had to be signed by an agent to obtain an audience for its bearer, determined which agent was entitled to receive the commission should a sale be effected. The value placed upon county rights to vend the carburetor was uniform. Any two counties in the United States could be bought for $1,000, and the purchaser, who bought the right in two of the most populous and wealthy counties in the country, paid no more therefor than must be paid for the right in two desert counties. It was to be a case of "first come, first served," and each purchaser was to be given the choice of unsold counties. Nor did the plans of the promoters leave out of consideration provision for the manufacture and distribution of carburetors. The citizens of Dallas City, Ill., a town across the river from Burlington, offered a bonus of $3,000 for the location of the company's factory in that place. The offer was accepted, and at the time defendant became interested the foundation of a somewhat pretentious factory building had been laid. It was the avowed purpose of the company to complete the building, equip it with the necessary machinery, and supply the demand for carburetors that might result from the disposition of county rights. Until that could be done, the practical utility of the invention was to a great extent conjectural. A few carburetors had been made and installed, one to an ordinary gasoline stove in plaintiff's office; but these by no means demonstrated the value of the invention, except, perhaps, for one use, and not clearly for that. A carburetor is a device for generating gas for fuel and lighting from a mixture of gasoline gas with air. It was claimed that this invention would revolutionize the art to the extent of substituting its product for all others for use in lighting and heating and in the generating of power. It readily occurs...