Flood v. Busch

• Citation: 146 S.W. 73
• Parties: FLOOD v. BUSCH et al.
• Decision Date: 02 April 1912
• Court: Missouri Court of Appeals

146 S.W. 73

FLOOD v. BUSCH et al.

St. Louis Court of Appeals. Missouri.

April 2, 1912.

Rehearing Denied April 16, 1912.

1. CORPORATIONS (§ 121)—SALE OF STOCK—RESCISSION—EVIDENCE.

In an action to rescind a contract under which the plaintiff purchased shares of stock, evidence held to show that the shares had some value at the time they were purchased.

2. FRAUD (§ 50)—EVIDENCE—PRESUMPTIONS AND BURDEN OF PROOF.

Fraud will not be presumed, but must be clearly and distinctly proved by the person alleging it.

3. CORPORATIONS (§ 121)—SALE OF STOCK— FRAUDULENT REPRESENTATIONS—EVIDENCE.

In an action to rescind a contract under which the plaintiff purchased shares of stock and to recover the purchase price, evidence held not to show fraud.

4. APPEAL AND ERROR (§ 1009)—REVIEW—FINDINGS OF FACT.

While, in a suit in equity, the court on appeal is not bound by the conclusion arrived at by the trial court on the evidence, great deference will be paid to it, even to the extent of accepting it absolutely, when the evidence is conflicting and the trial court has had the opportunity of hearing and seeing the witnesses.

5. CORPORATIONS (§ 215) — STOCKHOLDERS— FALSE REPRESENTATIONS INDUCING PURCHASE OF STOCK.

Where a person who asked another to purchase shares of stock was the agent of a corporation issuing the stock, and there is no evidence that individual incorporators took part in, sanctioned, or knew of his misrepresentations inducing the sale, they cannot be held liable therefor in an action to have a rescission of the sale and a return of the purchase price.

Appeal from St. Louis Circuit Court; Wm. M. Kinsey, Judge.

Action by Patrick Flood against Adolphus Busch and others. From a judgment for defendants, and an order overruling a motion for new trial, plaintiff appeals. Affirmed.

Appellant's points and authorities were as follows:

Any fraud perpetrated on a third party in the course of his employment, and for the benefit of his principal, must be imputed to the principal, whether or not the latter had actual knowledge of it. Judd v. Walker. 215 Mo. 312, 114 S. W. 979; Keyser v. Hinkle, 127 Mo. App. 62, 106 S. W. 98.

The defendants permitting the agent to sell the stock, statements concerning the value of the same are within his apparent authority. Darks v. Grocer Co., 146 Mo. App. 246, 130 S. W. 430.

To represent that the property of the corporation is unincumbered is a fraudulent representation. McClellan v. Scott, 24 Wis. 81; Water Valley Co. v. Seaman, 53 Miss. 655. Or that the company would pay certain dividends. Lawton v. Kittredge, 30 N. H. 500. Or that certain individuals were directors. 34 Beav. 639.

"The fact that officers of a corporation are innocent of the participation in the wrong of an agent, who has procured subscriptions of its stock by means of fraudulent representations, constitutes no defense to an action by a subscriber to rescind the subscription; nor is it a defense that the agent who procured the subscription believed the representations true, if the officers knew they were false, even though innocent of the agent's act in making them." Clark v. Edgar, 12 Mo. App. 345, 352; Id. 84 Mo. 106, 54 Am. Rep. 84; Talmadge v. Sanitary Security Co., 31 App. Div. 498, 52 N. Y. Supp. 139; In re Lerds Banking Co., 36 L. J. E. 642; Beach on Priv. Corps. vol. 2, p. 1088.

"The fact that the directors received no benefit from the proceeds of the sale does not release them from liability." Mack v. Latta, 83 App. Div. 242, 82 N. Y. Supp. 130; Barcus v. Gates, 89 Fed. 783, 32 C. C. A. 337.

Where several persons engage in a business jointly, and to facilitate such business use a corporate name, issue stock in the promotion of the scheme, and make false representations, they are liable to those who, relying upon such representations, purchase stock to their hurt. Hornblower v. Crandall, 7 Mo. App. 220; Salmon v. Richardson, 30 Conn. 360, 79 Am. Dec. 255.

"Purchasers of worthless stock may rescind, and recover money paid for same, if purchase was induced by a fraudulent board of directors." Taylor on Private Corporations, § 103; Cook on Stockholders, 157; Beach on Private Corporations, § 159; Seddon v. Virginia, etc., Co. (C. C.) 36 Fed. 6, 1 L. R. A. 108 (1888); Mack v. Latta, 178 N. Y. 525, 71 N. E. 97, 67 L. R. A. 126.

He may sue in equity for rescission, or for damages for the deceit. Ligon v. Minton (Ky.) 125 S. W. 304.

The doctrine of laches does not apply to this case. When, to discover the wrong, an investigation is necessary, a party is not bound to make it, but may rely upon representations made to him by the other party. Brockhaus v. Schilling, 52 Mo. App. 83; Wannell v. Kem, 57 Mo. 478; Brolaski v. Carr, 127 Mo. App. 286; Cottrill v. Krum, 100 Mo. 405, 13 S. W. 753, 18 Am. St. Rep. 549; Pomeroy v. Benton, 57 Mo. 531; Hess v. Draffen & Co., 99 Mo. App. 580, 74 S. W. 440.

Ownership of stock may be evidenced by assumption of proprietorship and possession. Fairbanks-Morse Co. v. Coulson Stock Food Co., 151 Mo. App. 260, 131 S. W. 894.

While the Supreme Court is inclined to defer to the findings of the trial court, it has never abdicated its right to review these findings in chancery cases. Glasock v. Glasock, 217 Mo. 362, 281, 117 S. W. 67.

It will review the evidence, and determine for itself whether or not he came to the right conclusion from it. Southern Bank v. Nichols, 202 Mo. 309, 320, 100 S. W. 613; First Nat. Bank v. Fry, 216 Mo. 24, 46, 115 S. W. 439.

John P. Leahy, for appellant. Nagel & Kirby, Reynolds & Harlan, E. G. Curtis, and Jeffries & Corum, for respondents.

REYNOLDS, P. J.

This suit was instituted in the circuit court of the city of St. Louis, against Adolphus Busch, Edward A. Faust, Arthur W. Lambert and Henry Koehler. In his petition plaintiff avers that on the 24th of May, 1907, and for sometime previous thereto, defendants were shareholders and directors in the North American Steel Company, a corporation of the state of West Virginia, having an office in the city of St. Louis, and at the times stated in the petition owned and controlled the whole or a majority of the stock of the corporation; that being desirous of obtaining money to pay the debts of the corporation, which they themselves had contracted, they employed one Charles D. Bolin as their agent to sell a portion of the capital stock of the corporation "which they, the defendants, owned;" that in order to persuade and induce plaintiff to purchase 20 shares of the capital stock of the corporation, defendants, through their agent Bolin, represented to plaintiff that the corporation was then in a flourishing condition; that there were no debts due by it; that the building, the land upon which the same was situated, the machinery and all other property of the corporation was free from incumbrances; that the plant was being operated at a great profit to the shareholders; that the holders of preferred stock in the corporation had received a dividend of 6 per cent.; that the corporation had orders to fill for a year ahead and which would keep the plant working for that time; that the stock offered for sale by defendants was part of treasury stock owned by them and that the proceeds of the sale thereof would be used for the purchase of machinery which would greatly cheapen the cost of production of planished steel; that defendant Busch, "a wealthy brewer of St. Louis," had invested large sums of money in the corporation, had taken a deep interest in its affairs and was one of its promoters and directors; that believing all these statements and representations to be true plaintiff, on the 24th of May, 1907, purchased from defendants 10 shares of the preferred and 10 shares of the common stock of the corporation, paying defendants therefor the sum of $1,000. Plaintiff further avers that the representations made by Bolin, that defendant Busch was at that time a director of the corporation, had taken a deep interest in its affairs and was a promoter thereof and a large shareholder therein, were true, but that every other statement and representation made by Bolin as the agent of defendants was false and that these false statements and representations were made by defendants through their said agent Bolin for the purpose of deceiving, misleading and defrauding plaintiff. It is further averred that the property of the corporation at the time mentioned consisted of a small and antiquated plant for the manufacture of planished steel, which had been acquired from another corporation and which was incumbered by a bond issue of $50,000, that being its full value, the payment of which the North American Steel Company assumed; that defendants, as promoters of the North American Steel Company acquired this plant without the expenditure of a single dollar, having previously capitalized the North American Steel Company for $1,300,000, and had paid for the plant by stock of the latter company issued to the owners of the plant; that although capitalized for $1,300,000, the North American Steel Company had no other property, real or personal, than the above mentioned plant and materials and stock in trade not exceeding the value of $15,000 at any time; that at the time the stock of the North American Steel Company was purchased by plaintiff it was indebted to an amount far in excess of its assets, that it was being operated at a loss "and never paid a dividend to the shares," was still incumbered by the bonds before mentioned, was insolvent, and a few weeks later the plant, by the orders of Busch and his codefendants was shut down and has not since been operated; that none of the defendants have invested any of their own money in the corporation, except that defendants Busch and Koehler have indorsed certain promissory notes of the corporation to an amount aggregating $30,000, which notes have not yet matured; that no portion of the money paid by plaintiff for the purchase of stock was used by defendants to purchase any new...