Farmers' & Merchants' State Bank v. Shaffer

• Citation: 147 N.W. 851
• Decision Date: 24 June 1914
• Docket Number: No. 29400.,29400.
• Parties: FARMERS' & MERCHANTS' STATE BANK v. SHAFFER.
• Court: United States State Supreme Court of Iowa

147 N.W. 851

FARMERS' & MERCHANTS' STATE BANK

v.SHAFFER.

No. 29400.

Supreme Court of Iowa.

June 24, 1914.

Appeal from District Court, Hamilton County; C. G. Lee, Judge.

Action at law upon a promissory note. Judgment for defendant, and plaintiff appeals. Reversed and remanded.Voris & Haas, of Marion, for appellant.

D. C. Chase and Wesley Martin, both of Webster City, for appellee.

WEAVER, J.

Defendant admits the signing and delivery of the note in suit, but alleges that it was obtained from him by the fraud and false representations of the payee by an agent, and that the plaintiff is not an innocent holder of said instrument. The note it appears, was given for shares of stock in a corporation known as the Stotts Signal Company and made payable to E. S. Stotts, who was the promoter, organizer, and principal manager of such company, though the alleged false representations are said to have been made by one Dodge, who negotiated the sale in behalf of Stotts or of the company. The alleged representations which are material in this case were to the effect that the company owned a large and valuable manufacturing plant free from incumbrance in Marion, Iowa, and was authorized to do business to issue stock in Iowa. These representations are alleged to have been false and that defendant, relying thereon, was thereby induced to make the purchase and give the note in suit, when in truth the company did not own or have any such property or assets, and its stock was entirely worthless, and by reason thereof defendant received no consideration for his said note.

In submitting the case to the jury the court withdrew from consideration all charges of fraud and misrepresentation except those already specifically mentioned, to wit, the alleged representation by Dodge that the corporation was the owner of a plant and building at Marion free from incumbrance, and that such corporation was authorized to do business in Iowa, and that stock was issued by proper authority. Upon these issues a verdict was returned for defendant and judgment entered against plaintiff for costs.

[1][2] I. It is argued with much earnestness that there is no evidence on which a verdict sustaining the charge of fraud and misrepresentation can be sustained. In our opinion this exception cannot be sustained. In a very recent case, Stotts v. Fairfield, 145 N. W. 61, we had occasion to consider the nature of this corporation, its condition, and its business affairs, and, while the issues were not in all respects identical, they involved many questions of fact and law which are common to that case and the one at bar. Both actions were brought upon promissory notes taken by Dodge for the stock of the company, both transactions occurred in the spring of 1910, and in both defense was made based on alleged fraud and false representations with respect to the company, its business and assets, and the value of the stock. In so far as the two cases have features in common, we shall not attempt here any extended restatement of the details or repeat the discussion there found upon the legal propositions involved. In considering whether there is evidence of fraud of misrepresentation, the facts as to the company itself--whether it appears to have been a thing of substance or otherwise--are material matters of inquiry in considering the alleged representations made by Dodge, and the question whether they were made in good faith. As found in the Stotts Case, so here the record would justify the jury in finding that at the date of the note in suit the company was practically without a dollar of available assets. It had an authorized capital stock of $5,000,000 of which $3,000,000 had been issued to Stotts, the payee of this note, for patents of no apparent value. The corporation had been organized under the laws of Arizona, and no permission or license had been obtained to do business in Iowa; but, as we shall later have occasion to point out, it does not clearly appear whether its organization was of a character rendering such permission or license necessary. Mr. Toms, president of the plaintiff bank, was made president of the company and acted as such for two years. He signed certificates of stock in blank and turned them over to Stotts and his lieutenants to dispose of at their discretion. The certificates for the shares sold defendant were signed by Toms. The company had never sold and never did sell a dollars worth of product from its factory. It had then no title to the real estate which it occupied, and upon its machinery or a large part thereof Toms held a bill of sale to secure a liability to himself. The record further tends to show that at and before the time when this stock was sold to defendant the company had become so involved in financial difficulties that, in the language of Mr. Toms, “some one had to go to Mr. Stotts' relief or close the factory.” Yet in the face of all these circumstances, with the firm tossing upon the financial breakers from which it never extricated itself, the board of directors, including Mr. Toms (if not others connected with the plaintiff bank), went through the familiar farce of “advancing” the price per share of stock which was clearly without actual value, from 10 cents to 25 cents, then 50 cents and finally a dollar. A little later, and after the defendant made his purchase, the pretense of active business ceased, and the promoters organized a new corporation to carry on the same ostensible enterprise, leaving the old corporation dormant and its stock valueless. Of the desperate, if not hopeless, character of this venture at the date of the sale of the stock to defendant, neither Stotts, Dodge, nor Toms could well have been ignorant, and when Dodge represented to defendant (as for the purposes of this appeal we must assume he did) that the company had a plant at Marion worth $25,000 and owed nothing and would have all the money it wanted to carry on the business, he made a false representation concerning a material matter, and, if defendant relied thereon as he says he did in making the purchase and giving the note, he could rightly repudiate the transaction and resist payment of the note in the hands of any person other than a holder for value without notice of the alleged fraud. Without further discussion of the evidence, it is enough to say that in this case, as in the Stotts Case, supra, we hold that the finding that the alleged false representation as to the property and assets of the company were made substantially as charged has sufficient support in the record.

[3] But it is further said that assuming the fraud and...