Dennis v. Thomson

• Decision Date: 27 October 1931
• Citation: 240 Ky. 727
• Parties: Dennis v. Thomson et al.
• Court: United States State Supreme Court — District of Kentucky

240 Ky. 727

Dennis v. Thomson et al.

Court of Appeals of Kentucky. Common Pleas Branch, Third Division.

Decided October 27, 1931.

1. Corporations. — Stockholder could not maintain action for fraud in inducing stock purchase against insolvent corporation which had long prior ceased to function.

2. Fraud. — Fraud is not to be presumed.

3. Fraud. — One charging fraud must establish accusation by evidence which will overcome presumption of innocence.

4. Fraud. — Stockholder suing another stockholder for fraud in inducing purchase had burden of establishing fraud.

In other words, for plaintiff stockholder to recover, he was required to establish by evidence that defendant stockholder or his agent made material representation; that representation was false; that, when defendant or agent made it, it was known to be false or made recklessly without any knowledge of its truth as a positive assertion; that it was

made with intention to induce plaintiff stockholder to act; that plaintiff acted in reliance thereon; and that he was injured thereby.

5. Fraud. — Causing false impression constitutes fraud, although statement is true as far as it goes.

Causing the false impression constitutes palpable fraud, since a concealment is in fact a false representation of that which is disclosed as the whole truth.

6. Fraud. — Duty to speak may arise from partial disclosure; speaker being under duty of saying nothing or telling whole truth.

7. Fraud. — To determine existence of false statements, if any, in prospectus used to induce purchase of corporate stock, prospectus should be interpreted by effect it has on ordinary mind.

8. Fraud. — Presenting corporation by prospectus as successfully operating without disclosing facts regarding equipment, and that corporation was engaged only in making laboratory tests, constituted fraud on prospective purchasers.

9. Fraud. — False impression may consist in concealment of truth.

10. Fraud. — Whether party inducing plaintiff to purchase stock was agent of defendant stockholder held for jury, as regards liability for alleged fraud.

11. Fraud. — Although stockholder had resigned as officer, his liability for misrepresentations, if any, in prospectus used to induce stock purchase, was same as if he were officer, where he permitted name to be used as such in prospectus.

The stockholder was liable as if he were officer of corporation, since the statement in the prospectus that he was at time of sale of stock a director and secretary was itself false and he could not avail himself of his own fraudulent statement to save himself from liability by virtue of other and additional false statements contained in prospectus.

12. Fraud. — If defendant and others issued deceitful prospectus known by them to be such, with intent to defraud prospective purchasers of corporate stock, defendant would be liable to purchaser even if other obtaining purchase by use of prospectus did not represent defendant.

13. False Pretenses. — Elements of "false pretense" stated.

Elements of false pretense are (a) the false pretense must be made by the defendant, or by some one whom he had induced to make it; (b) the defendant must have knowledge of the falsity of the pretense, statement, or token when he made it; (c) the person defrauded must have relied on the pretense and have been induced thereby to part with his money; (d) the money must have been obtained by defendant or some one in his behalf; (e) the defendant must have had an intent to defraud; (f) actual defrauding must have resulted.

14. Evidence. — Party inducing plaintiff to purchase stock having testified that he conveyed prospectus to plaintiff to induce purchase, plaintiff's testimony that he relied on statements in prospectus held admissible in action for fraud.

15. Witnesses. — Although party inducing plaintiff to purchase corporate stock had died, purchaser's reliance on alleged false statement of prospectus was not "transaction with one deceased" within statute (Civil Code of Practice, sec. 606).

16. Evidence. — In action for fraud in inducing purchase of corporate stock, corporate record relating to defendant stockholder and his connection with corporation held admissible.

17. Evidence. — In action for fraud in inducing purchase of stock, contents of lost corporate records relating to defendant stockholder and his connection with corporation could be proved by witnesses present at directors' meeting.

Appeal from Jefferson Circuit Court.

WOODWARD, HAMILTON & HOBSON and WILBUR FIELDS for appellant.

BRUCE & BULLITT and LEO WOLFORD for appellees.

OPINION OF THE COURT BY JUDGE RICHARDSON.

Reversing.

This action is for damages for alleged false representations whereby the appellant, Holmes V.M. Dennis, Jr., as he alleges, was induced to purchase stock in the Chemical Fuel Company of America, which proved valueless. It was instituted against the Chemical Fuel Company of America and W.A. Thomson, Jr.

The trial court sustained the company's demurrer to the petition. On a review of the ruling of the court on this demurrer, we find that the petition may be considered as stating facts sufficient to constitute a cause of action against it, except for the presence of a certain allegation therein. It is alleged that the company at the time of the sale of the stock to appellant, and continuously since, and at the institution of the action, was insolvent, and that it had ceased to function long prior thereto. Such an allegation brings this case as to the company within the rule enunciated by this court in Palmer et al. v. Citizens' Bank of Murray et al., 179 Ky. 54, 200 S.W. 41, 43; Deppen v. German American Title Company, 70 S.W. 868, 24 Ky. Law Rep. 1110; Smith, Banking Commissioner, v. Jones, 173 Ky. 776, 191 S.W. 500, L.R.A. 1917C, 890; Reid v. Owensboro Savings Bank, 141 Ky. 444, 132 S.W. 1026; Fletcher American Co. v. Culbertson, 215 Ky. 695, 286 S.W. 984; Preston v. Jeffers, Receiver, 179 Ky. 384, 200 S.W. 654; Robertson v. Owensboro Savings Bank, 150 Ky. 50, 149 S.W. 1144; Little v. Owensboro Banking Company, 150 Ky. 331, 150 S.W. 334.

In Palmer v. Citizens' Bank of Murray, supra, we stated the rule in this language:

"The principle which applies to a transaction of this kind is, if a stockholder is induced by false or fraudulent representations of the officers of a corporation to buy its stock, he may, while the corporation is solvent, by an action brought within a reasonable time after the fraud is discovered by him, secure a rescission of his purchase upon such terms as are equitable, or recover such damages as he has sustained by the fraud. He cannot obtain relief if the action is not commenced until the corporation has become insolvent, or until proceedings have been instituted for the liquidation of its affairs, unless he had become a stockholder so recently before the insolvency that he has not had reasonable time or opportunity to investigate its affairs and discover the fraud, and had not received any dividend or other return for his investment in the stock. The reason given for the latter part of this rule is that, if he waits until the corporation becomes insolvent or its affairs are in course of liquidation, his attempt to secure a rescission or damages for the fraud, which has been prepetrated upon him, would affect the rights of the creditors of the institution."

It is apparent that it is our view that the trial court did not err in sustaining this demurrer to the petition.

We are required to review a trial of the case by the court with a jury as to the appellee W.A. Thompson, Jr., wherein a peremptory instruction was given at the close of the evidence in his behalf. A verdict was accordingly returned, favorable to him; an order entered dismissing the original, amended, and substituted and second amended petition, and from which appellant appeals.

The story presented in this case is neither a new nor an unusual one. Its interpretation and the application of the law to it require a statement of the issues and resume of the evidence adduced on the trial.

For his cause of action appellant relied upon certain alleged false representations which are alleged to have been made to him by W.A. Thomson, Jr., and a Mr. Heath, which are substantially as follows:

"(a) That the corporation had authorized 20,000 shares of 7% cumulative preferred stock, and 10,000 shares of 6% preferred, and 20,000 shares of common stock, all of the par value of $100 per share.

"(b) That of the total stock approximately 6,000 shares of each class were then owned by the original subscribers.

"(c) That each of the subscribers had not paid the full par value of and for said stock to the corporation, nor were they the owners of as much as 2000 shares of either class of the corporation.

"(d) That the corporation had profitable contracts for its alleged product with the General Petroleum Company of Los Angeles, California, and the Inter-Ocean Oil Company of Baltimore, and that like contracts were being or had been prepared between it and the Tide Water Oil Company of Bayonne, and the White Star Oil Company of Los Angeles for the installation and operation of its equipment in their refineries on a royalty basis.

"(e) That such contract `would pay to the corporate defendant an annual revenue of $4,000,000.'

"(f) That the defendant corporation maintained a plant of 1000 barrels capacity at Louisville, Ky., properly equipped, and another large plant at Newark, N.J., and that the company had expended in these improvements in excess of $600,000, which sum they represented to the plaintiff had been supplied by the individuals composing the original subscribers.

"(g) That the defendant Thomson had been authorized by the corporation to offer a limited amount of the units of its stock for sale at the price of $300 for one share of stock or multiples thereof.

"(h) At the time of the sale it was represented, that the Chemical Fuel Company of America had...