Evartson K. Smith v. E. H. And S. H. Martin

• Decision Date: 23 January 1919
• Citation: 106 A. 666,93 Vt. 111
• Parties: EVARTSON K. SMITH v. E. H. AND S. H. MARTIN
• Court: Vermont Supreme Court

106 A. 666

93 Vt. 111

EVARTSON K. SMITH v. E. H. AND S. H. MARTIN

Supreme Court of Vermont

January 23, 1919

November Term, 1917.

ACTION OF TORT for deceit in the sale of forty shares of the capital stock of a corporation. Plea, the general issue. Trial by jury at the September Term, 1916, Franklin County, Stanton J., presiding. Verdict and judgment for the plaintiff against both defendants. The defendants excepted. The opinion states the case.

Judgment affirmed, except as to damages. As to that question, judgment is reversed, and cause remanded.

E A. Ayers, J. W. Redmond and Elmer Johnso for the defendants.

Present WATSON, C. J., HASELTON, POWERS, TAYLOR, and MILES, JJ.

OPINION

TAYLOR

This is an action of tort for deceit in the sale of forty shares of the capital stock of the H. F. Martin & Son Company. The defendants severally answered a general denial. There was trial by jury, with verdict and judgment for the plaintiff against both defendants for $ 4,398.90 damages and costs. Both defendants bring exceptions.

Early in 1910 the H. F. Martin & Son Company, a corporation hereinafter called the company, was organized and commenced a retail hardware and plumbing business at Swanton, Vermont. Defendant E. H. Martin was president and defendant S. H. Martin, treasurer and general manager of the corporation. The original capital stock of the corporation was $ 10,000, of which $ 8,000 was sold and fully paid. The balance remained as treasury stock until the time of the transaction here involved. E. H. Martin lived in Burlington, Vermont, and was an officer and traveling salesman of the Burlington Grocery Company. He had been in the mercantile business many years, and in the business of the grocery company made regular visits to Swanton and neighboring towns "twice in two weeks." He went to Swanton at other times to attend the meetings of the corporation. When in Swanton he visited the store and office of the company, and, among other things, examined the bills payable book, the by-laws of the corporation requiring all bills to be approved by him as president before payment. S. H. Martin lived in Swanton and had the general management of the business. At the time plaintiff purchased the stock he knew of the relation of both defendants to the business.

The company did a general retail hardware business and quite an extensive plumbing and heating business, employing from six to eight men outside the store. It employed a bookkeeper, but S. H. Martin kept the cash book and blotter, received and opened the mail, handled all the money, and had general oversight of the bookkeeping. From the time the company began business a double entry system of bookkeeping was in use. The system required that bills of goods purchased should be entered in the bills payable book, whence they would be credited to the respective sellers. The total of such bills at the end of each month would be posted from this book to the debit of merchandise account and to the credit of accounts payable in the private ledger. Among the other books employed were a cashbook, a salesbook journal, and a blotter. All the credit business of the corporation was charged in the salesbook journal, and the total of such sales each month was credited to merchandise account and charged to accounts receivable in the private ledger. All cash transactions were supposed to be recorded in the cashbook, and from it the bookkeeper obtained all the items relating to such transactions, which he posted to other accounts. The system contemplated a monthly trial balance.

Plaintiff entered the employ of the company as bookkeeper December 26, 1912. He was then about 24 years of age, a graduate of a business college where he had been educated in keeping accounts. He had been out of school a year, but had had no actual experience in bookkeeping. He had studied and practiced in school a system of bookkeeping somewhat similar to that employed by the company, but testified that he was "rusty" on the subject of bookkeeping. No posting of the books had been done for the two months before the plaintiff entered the employ of the company. He was required to post up the books and make an annual report before January 1, 1913, to be submitted to the stockholders at the annual meeting, which under the by-laws should be held January 3, 1913. This report was to be in the form of a trial balance, and, as the plaintiff knew, it was first necessary to ascertain that all invoices of merchandise purchased were recorded in the billbook. Plaintiff knew nothing about the bills payable except what appeared from the books of the company and what S. H. Martin told him. The evidence at this point was conflicting. Plaintiff testified that Martin directed him to the bill file and handed him some other bills, all of which he posted, but that bills later came to light of which he had no knowledge. Martin testified that the bills were kept part on a file in the company's office and part in the desk used by the bookkeeper, and that he showed the plaintiff where they were and directed him to post them to the billbook. Bills owing to the amount of $ 2,346.06 were not posted, which falsified the account of bills payable and the statement of the standing of the company to that amount. Sums aggregating $ 211.76 had been paid by the company on account of bills owing that were not entered in the billbook. They appeared as items of credit in the cashbook, and, as the system required, were posted by the plaintiff to the debit side of the proper individual accounts; but, as the corresponding item did not appear on the other side of the accounts, they erroneously appeared as due the company. In making up the annual statement these items were included in accounts receivable and falsified the statement as to such accounts to that extent. With all errors corrected, the statement should have shown a net loss of $ 1,350.90, instead of a net gain of $ 1,207.38, and the net worth of the company $ 6,841.42 as of December 31, 1912, instead of $ 9,207.38.

About the time the plaintiff entered the employ of the company the defendants decided to increase the capital stock to $ 15,000 and to dispose of the treasury stock and $ 2,000 of [106 A. 669] the additional stock. Some time shortly after the plaintiff made up the annual statement, S. H. Martin opened the negotiations with him to purchase the stock. At this interview Martin told the plaintiff he was thinking about taking in another partner, asked him how he liked the business, and whether he would like to go in or not; to which the plaintiff replied that he did not know anything about the business and did not know whether he would like it or not. About a week later E. H. Martin spoke to the plaintiff about the matter. Plaintiff told him that before he bought any of the stock he (plaintiff) would have to get the consent of his father. Still later plaintiff, his father, and the defendants met with reference to the matter. Defendants had the annual statement which was shown to plaintiff's father. S. H. Martin pointed out "what a great business it would be" for the plaintiff to go into, and said the paper produced was a true statement of the standing of the company; showed what a "great business" they did that year and had been doing for three years.

Plaintiff's father inquired as to the firms the company was dealing with and the amount owed each; and at E. H. Martin's direction plaintiff prepared from the books an itemized statement of bills payable and took it to his father. This statement showed the same total of bills payable as the annual statement. As an inducement to the purchase of the stock it was proposed to make plaintiff treasurer, secretary, and assistant manager of the company at a salary of $ 1,000 a year if he "come in." As a result of the negotiations the plaintiff said if what the defendants represented to his father was true, he would take the stock; and thereupon defendants reaffirmed the truth of their statements. Plaintiff took and paid for the stock $ 2,000 February 13 and the balance on March 6, 1913, relying, as he testified, upon defendants' statements. On February 26th S. H. Martin resigned as secretary and treasurer, and the plaintiff was elected to fill the vacancy and also as assistant manager of the company. He acted as such and kept the accounts until December 16, 1913, when he resigned. The company was then in failing circumstances, and early in the following January made an assignment for the benefit of its creditors, under which the affairs of the corporation were liquidated and the creditors received 88 per cent. of their claims. The plaintiff claimed that the stock was worthless when he purchased it, and the jury evidently awarded damages on that basis.

The questions first briefed arise under the defendants' motion for a directed verdict.

It is insisted that as against both defendants plaintiff is estopped to deny the truth of the representation relied upon that the balance sheet was a true statement; showed the true standing of the company. The argument is that plaintiff made the balance sheet as a part of his duties as bookkeeper which he now claims to have been false; that at the time he knew that it materially falsified the financial standing of the company; that he knew that it was to be shown to the directors, including E. H. Martin, to show the true condition of the company; that he knew E. H. Martin had little opportunity to acquaint himself therewith; that he knew that the amount therein falsely shown to have been earned was credited to profit and loss; that, when the defendants during the negotiations for the purchase of the stock made the representations relied upon, he knew they were false, but kept silent; and that the defendants,...