Dennis v. Thomson

• Decision Date: 27 October 1931
• Citation: 240 Ky. 727,43 S.W.2d 18
• Parties: DENNIS v. THOMSON et al.
• Court: Kentucky Court of Appeals

43 S.W.2d 18

240 Ky. 727

DENNIS v. THOMSON et al.

Court of Appeals of Kentucky

October 27, 1931

Appeal from Circuit Court, Jefferson County, Common Pleas Branch Third Division.

Action by Holmes V. M. Dennis, Jr., against W. A. Thomson, Jr., and the Chemical Fuei Company of America. From an order sustaining the demurrer of the Chemical Fuel Company of America to the petition and from a judgment for W. A Thomson, Jr., plaintiff appeals.

Order sustaining demurrer affirmed, and judgment for W. A. Thomson Jr., reversed for a new trial.

Woodward, Hamilton & Hobson and Wilbur Fields, all of Louisville, for appellant.

Bruce & Bullitt and Leo Wolford, all of Louisville, for appellees.

RICHARDSON J.

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 perpetrated 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. Thomson, 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 a résumé 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 satisfactorily operated an experimental refining plant of one thousand (1000) barrels capacity in Louisville, Kentucky, that an additional plant was built at Newark, N. J. for the purpose of further developing the process; that its process and method of operating were completely standardized at the plants. ***"

An issue was formed by appropriate pleadings.

The evidence heard to sustain the charge of fraud may be summarized as follows: It is stated in the prospectus:

"That the present offer (of stock) is limited to 2000 shares of each class, subject to prior sales. Subscriptions will be taken for lots of one share of each class of stock or multiples thereof, at $300 the block. ***

The company's first operation consisted of an experimental plant of 1000 barrels capacity in Louisville. Results at this refinery were satisfactory and a similar installation erected at Newark, N. J. Here a completely standardized unit was operated for a period of months. *** Sustained performance has shown the process to be technically successful. Contracts have been entered into with the following companies; General Petroleum Company of Los Angeles, Inter-Ocean Oil Company of Baltimore. Contracts are also awaiting signatures with the following companies; Tide Water Oil Company of Bayonne, White Star Oil Company of Los Angeles, for the installation and operation of its equipment in their refineries and on a royalty basis. *** The process of the Chemical Fuel Company, though complex in theory is very simple in design. *** Patents on this process have been taken out and are now the property of the Chemical Fuel Company. *** E. W. Stevens, inventor of the process, formerly with the U.S. Bureau of Mines. *** The Company first built an experimental plant of one thousand (1,000) barrels capacity in Louisville, Ky.

This plant was equipped with storage, tank cars, necessary dehydrating machines &c., to handle oil products in the many stages of their development. Up to this point and covering a period of two years, the company has expended in excess of over $600,000.00. These funds were supplied by the individuals composing the original subscribers. The present offering is the first of the company's securities to be offered for public distribution. The funds to be derived from the security offered are to be used for construction and furtherance of our existing contracts. *** The commercial unit has been successfully run by numerous engineers. *** The plants of the corporation have been standardized."

It is shown by the record of the board of directors that, instead of authorizing the offering for sale of 2,000 shares of each class, subject to prior sales, subscriptions in lots of one share of each class of stock or multiples thereof at $300 a block, it had delegated only authority to the appellee "to sell outside the state of Kentucky not exceeding 1000 shares of preferred, debenture and common stock on the basis of net royalties to the company of not less than $80.00 per share, and a like amount of debenture and common stock to go with the sale as a bonus."

It is shown by the evidence that, instead of the "present offering" being "the first offering of its stocks," Converse D. Marsh, prior thereto, had made other sales, or had offered the stock for sale.

It is further shown that, instead of owning or possessing $600,000 worth of property, even if such sum had been theretofore expended for improvements, it did not at that time own same but that the company was in such financial straits that, at a meeting of the board of directors on July 30, 1923, a resolution was adopted stating that the company was embarrassed by the lack of funds to carry on its business, and that to supply this immediate and urgent...