Continental Trust Co. v. Cowart

• Decision Date: 08 January 1915
• Docket Number: (No. 6835.)
• Citation: 173 S.W. 588
• Parties: CONTINENTAL TRUST CO. et al. v. COWART.
• Court: Texas Court of Appeals

173 S.W. 588

CONTINENTAL TRUST CO. et al. v. COWART.

(No. 6835.)

Court of Civil Appeals of Texas. Galveston.

January 8, 1915.

Appeal from District Court, Angelina County; Lee D. Guinn, Judge.

Suit by S. J. Cowart, for himself and for the benefit of such stockholders as may join in the suit, against the Continental Trust Company and others. From a decree appointing a receiver of the corporation, defendants appeal. Reversed and rendered.

Monta J. Moore, of Los Angeles, Cal., and Jno. Lovejoy and Lane, Wolters & Storey, all of Houston, for appellants. Mantooth & Collins, of Lufkin, and Hamp P. Abney, of Sherman, for appellee.

PLEASANTS, C. J.

This suit was brought by appellee, a minority stockholder in appellant corporation, for himself and for the benefit of such stockholders as might join in said suit, against the appellant Continental Trust Company, a corporation organized under the laws of the state of Arizona, and having its office and place of business in the city of Houston, Harris county, Tex., and. Jonathan Lane, R. W. Thompson, J. H. Thompson, W. Strauss, J. F. Sadler, Jr., Jake Wolters, and N. R. Lynd, all of whom are alleged to be residents of Harris county, except the defendant Sadler, who is alleged to reside in Bexar county. The nature and purpose of the suit is thus stated in appellee's amended petition, upon which the hearing was had in the court below:

"This cause of action is brought against the Continental Trust Company, as a corporation, and against other defendants herein named individually and collectively, for the sum of $5,000 paid to the said defendants, officers, directors, and agents of said corporation, and for the cancellation of plaintiff's certain note for $5,000 due and payable to the American Surety & Casualty Company, and to cancel the mortgage lien on 1,600 acres of land, more or less, hereinafter more particularly described, which mortgage creates a cloud and incumbrance upon said survey of land, because of the fraudulent misrepresentations made by the officers, directors, and agents of said corporation, and for the appointment of a receiver, and, in the alternative, for the benefit of your said plaintiff in the cancellation of said $5,000 note, and lien and incumbrance upon said tract of land and for the use and benefit of the Continental Trust Company, and for such stockholders as may join herein."

The pleadings of plaintiff are voluminous and complex, and we shall only set out such of the allegations as are necessary to show the issues presented.

After alleging the organization of the appellant corporation on or about April 10, 1911, under the laws of the state of Arizona, with its home office in said state, and its Texas office and place of business at Houston, Harris county, and having as its officers, among others, the defendants before named, it is alleged:

That during the period of the promotion, organization, and chartering of appellant corporation the American Surety & Casualty Company was organized and chartered under the laws of this state with a capital stock of $200,000, and having the defendant Jonathan Lane as its president, and several of the other defendants herein, with a number of other named persons, as directors, "and that the law firm of Lane, Wolters & Storey were the legal advisers of said last-named corporation, and were stockholders, officers, and directors in said last-named corporation, and they together with the defendants Jonathan Lane, J. R. Thompson, W. R. Thompson, and J. F. Sadler, Jr., were general promoters and managers of said corporation in its promotion, organization, and chartering, and thereafter in the management of its moneys, funds, and credits, and are such officers, directors, and managers ever since and now; that the other officers named above so far as plaintiff is informed and believes, took no active part in the management of said corporation."

It is then alleged that during the year 1912 plaintiff was induced by an agent of said defendants to subscribe for 50 shares of stock in the American Surety & Casualty Company at a price of $200 per share, the face value of said shares being $100 each; that said agent represented to plaintiff that said shares were worth the sum of $200 each, and, relying upon said representations, plaintiff purchased same and paid to defendants the sum of $5,000, and executed his note for $5,000, payable to the American Surety & Casualty Company, and secured by said 50 shares of stock which were attached to said note as collateral, and also by a deed of trust upon a tract of 1,600 acres of land in Angelina county, said land being fully described in the petition.

The next allegation is, in substance:

That in March, 1913, the individual defendants before named "as stockholders, agents, officers, directors, and lawyers" in both the American Surety & Casualty Company and the appellant corporation "illegally and fraudulently entered into a combination, contract, and agreement to acquire from the stockholders of the American Surety & Casualty Company their stock in said company in exchange for stock in the appellant corporation, said exchange to be made upon a valuation of $160 for each $100 share of American Surety & Casualty Company stock, and $20 for each $10 share of the stock of appellant corporation; that, relying upon the representations of defendants and their agents that the stock in appellant corporation was of much greater value than stock in the American Surety & Casualty Company, plaintiff exchanged his 50 shares of stock in said last-named company for stock in appellant corporation upon the basis of value above stated."

The representations as to the value of the stock of the two corporations, and especially the representations as to the business of appellant corporation and the value of its assets, are alleged to have been false and fraudulent, and that plaintiff believing said representations to be true, made the exchange of stock as before stated, receiving in lieu of his 50 shares of stock in the American Surety & Casualty Company of the face value of $100 per share 400 shares of stock in appellant corporation of the face value of $10 per share. The said alleged false representations are charged to have been made in Angelina county by N. R. Lynd, acting for and on behalf of the other defendants, and to have been repeated and confirmed by the other defendants. The most material allegations as to the false representations of defendants are as follows:

"The said N. R. Lynd further represented to your said plaintiff that the Continental Trust Company was a legally organized and growing organization, actually engaged in doing business as a trust company, and a general money business, except that said corporation was not allowed to do a banking business; that said Continental Trust Company had assets of practically $2,000,000 in value, with a surplus and undivided profits of more than $500,000; that said corporation had been paying quarterly dividends of 5 per cent., making a dividend of 20 per cent. per annum on the par value of the stock, or 10 per cent. annual interest or income on the investment of $200 for $100.

"Said Lynd and other defendants herein represented to plaintiff that all of the assets of the Continental Trust Company were of the most choice character; that the loans it had made and those it had advanced on security represented by real estate were advanced on such real estate at a 50 per cent. valuation of its real value, and consisting of first mortgage on real estate, as secures that part of its assets represented by real estate loans; that said Continental Trust Company had ample cash on hand and in bank to successfully carry on a general trust business, and that, where loans were made or money advanced out of the funds of the company, it was invariably secured by real estate at not more than 50 per cent. of its cash market value, or in bonds or stock which were gilt-edge, and of first class or highest class of commercial paper; that said dividends so paid as above set out and had been paid and will be paid by said Continental Trust Company out of the profits arising from the transaction of its business and not otherwise.

"The said N. R. Lynd and the said defendants herein further represented to this plaintiff that, if he would exchange his stock in the American Surety & Casualty Company at 20 per cent. discount of its par value, and take stock in the Continental Trust Company at $2 for $1 of its par value, that the excess in valuation of the Continental Trust Company's stock would more than repay him for the depreciation of his stock in the American Surety & Casualty Company, and that so soon as the stock was issued in the Continental Trust Company said Continental Trust Company would become the owner of the note plaintiff had theretofore executed to the American Surety & Casualty Company, and that said Continental Trust Company would at once release the mortgage on the land in Angelina county above set out, and would take as sole security for the $5,000 balance due for stock so purchased by him for the stock in the Continental Trust Company, and that the dividends declared and to be declared as a stockholder in Continental Trust Company would more than pay the interest due and to become due on the said note for $5,000, and that said interest would be canceled by said dividend and would leave the plaintiff a balance for the extinguishment of said note. * * *

"Plaintiff further avers that, in addition to the statements so made by said N. R. Lynd in the town of Lufkin, county of Angelina, state of Texas, all of which he believed and upon which he acted thereafter in the closing of said contract, the said defendants Jonathan Lane and W. Strauss did by telegram directed to the plaintiff at Lufkin, Angelina county, Tex., from the city of Houston, invite him to come to Houston, at their expense, for a further discussion of the question of exchange of stock,...