Cleaves v. Thompson

• Decision Date: 11 December 1926
• Docket Number: 26,763
• Citation: 251 P. 429,122 Kan. 43
• Parties: G. O. CLEAVES, Appellant, v. H. E. THOMPSON, D. R. BROOKS, W. I. FUNK, JOHN MADDEN, JR., S. S. WILLIAMSON, and R. S. MEEKER, as Receiver for THE VICTORY MILL AND ELEVATOR COMPANY, Appellees
• Court: Kansas Supreme Court

251 P. 429

122 Kan. 43

G. O. CLEAVES, Appellant, v. H. E. THOMPSON, D. R. BROOKS, W. I. FUNK, JOHN MADDEN, JR., S. S. WILLIAMSON, and R. S. MEEKER, as Receiver for THE VICTORY MILL AND ELEVATOR COMPANY, Appellees

No. 26,763

Supreme Court of Kansas

December 11, 1926

Decided July, 1926.

Appeal from Sedgwick district court, division No. 2; THORNTON W SARGENT, judge.

Judgment reversed and cause remanded.

SYLLABUS

SYLLABUS BY THE COURT.

1. CONTRACTS--Rescission--Fraud and Misrepresentation--Waiver or Laches. Where a party desires to rescind a contract on the ground of fraud and misrepresentations, he must, upon discovery of the facts, at once or within a reasonable time, announce his purpose and adhere to it.

2. SAME--Subscriptions for Stock--Ratification Preventing Rescission. Where C subscribed for stock or units in a common law trust which was organized for the purpose of erecting a mill and elevator and carrying on the milling business, and where he afterwards visited the office of the trust on frequent occasions and was informed of its progress, and where the stockholders and directors of the trust later incorporated the business and issued stock in the corporation in exchange for and in lieu of the stock or units in the trust, and C upon notice, took his trust stock to the office of the corporation and received corporation stock in exchange therefor, and afterwards filed an action for damages on account of the alleged false and fraudulent representations made in procuring his subscription to the trust stock, he was not thereafter entitled to a rescission of his contract of subscription.

William Keith, of Wichita, for the appellant.

A. V. Roberts, John Madden and John Madden, Jr., all of Wichita, for the appellees.

OPINION

HOPKINS, J.:

The action was one to rescind a subscription for stock in a common law trust and to recover the amount paid therefor. Plaintiff appeals from an order sustaining a demurrer by the defendant Madden to plaintiff's evidence, and Madden appeals from a judgment against him as trustee.

Briefly the facts are in substance as follows:

About June 7, 1919, defendants, Thompson, Brooks, Funk, Williamson and Madden, Jr., entered into an agreement and declaration of trust for the purpose of establishing a mill and elevator and carrying on a general milling business at Wichita under the name of the Victory Flour Mills Company. Williamson was president, and Madden, secretary-treasurer. Shortly after its organization, an extensive campaign for promotion was begun. The trustees entered into a contract with Funk as fiscal agent for the placing of the stock. Funk hired his agents, sold stock and returned the proceeds to the trust, less his commission. The trust purchased a six-acre tract as a site for a mill and elevator. The purpose was to erect a flour mill with a capacity of 1,250 barrels of flour per day and an elevator with a storage capacity of 350,000 barrels. In August or September, 1919, it began operation of a grain department, setting aside $ 5,000 for that purpose. About December 1, 1919, the plaintiff was visited by M. L. Howe, a stock salesman, through whose solicitation plaintiff subscribed for ten shares of stock in the trust of the par value of $ 100 each, executing his note for $ 500. In 1920, it was decided to incorporate the business, and on July 2 a charter was secured under the name of "The Victory Mill and Elevator Company." On July 30 following, the business of the trust, comprising all of its assets and liabilities, was transferred to the corporation. This action appears to have been acquiesced in by all of the stockholders including the plaintiff (although he alleges otherwise), who took his trust stock to the company offices and exchanged it for stock in the corporation. The corporation having taken over the building site and other assets of the trust and assumed its obligations, continued the business it had established of buying and selling grain, but did not erect the mill and elevator on account of the high price of building materials. Plaintiff, having grown dissatisfied with the manner in which the corporation was proceeding with its business, on July 19, 1922, filed his petition alleging that the defendants, acting through Howe, had procured his subscription through false and fraudulent representations. He alleged that by reason of the premises he had been damaged in the sum of $ 500, for which amount he prayed judgment with interest, for cancellation of his note and such other and further relief as might be deemed just and equitable. Thereafter, he asked and was granted leave to file two amended petitions. The second is not set out, but in the third, filed March 8, 1924, he prayed for rescission of his contract of subscription, for cancellation of his stock and to recover $ 500 and interest.

On October 8, 1923, in another proceeding then pending against it, R. S. Meeker was appointed receiver for the corporation, and on March 8, 1924, plaintiff asked leave to make the receiver a defendant. In his last amended petition, filed in March, 1924, he alleged that he had not been aware of the fraud practiced upon him by the defendants until the month of July, 1922. While judgment was for Madden personally, on his demurrer to the evidence the court rendered judgment against Meeker as receiver and all the other defendants as trustees.

The plaintiff maintains that the court erred in its application of the law to the facts so far as they related to the defendant Madden; in holding that the evidence warranted a finding that Madden received no benefits from the transaction in question; in holding that it was necessary for Madden under the allegations of plaintiff's petition to have received financial or direct benefit from the transaction in question in order to be liable for the alleged fraud practiced upon the plaintiff.

The defendant Madden contends that the plaintiff is not entitled to the remedy of rescission; that the representations made in the sale of the stock were true; also that they were matters of opinion and therefore nonactionable; that there was no evidence of agency as against him; that plaintiff had no right to recover because the corporation was not made a party defendant and because plaintiff's cause of action was barred by the statute of limitations.

There are several reasons in our opinion why the plaintiff must fail. Discussion of all of them is, however, not necessary. In his first petition, he alleged and sought to recover damages. In his last amended petition, he tendered back his stock and sought...