Franey v. Warner

• Decision Date: 30 April 1897
• Citation: 96 Wis. 222,71 N.W. 81
• Parties: FRANEY v. WARNER ET AL.
• Court: Wisconsin Supreme Court

96 Wis. 222

71 N.W. 81

FRANEY

v.WARNER ET AL.

Supreme Court of Wisconsin.

April 30, 1897.

Appeal from circuit court, Milwaukee county; D. H. Johnson, Judge.

Action by Joseph L. Franey against Edgar E. Warner and others. From a judgment in favor of plaintiff, certain defendants appeal. Reversed.

Action to rescind a transaction whereby plaintiff was induced by fraudulent representations made by defendants Warner, Warner, and Wambold to join with them in the formation of a corporation to purchase certain land for $45,000, said defendants pretending that said land was to be bought of an outside party, who was the owner, and that all who united in the scheme would share in proportion to their respective subscriptions in the actual cost of the land and the profits of the enterprise, when, in fact, such defendants had obtained the right to purchase the property for $32,727, and secretly purposed making the difference between that and the selling price to the corporation of $45,000. The complaint contained allegations to the effect of the foregoing, and that the scheme was consummated by the formation of the corporation, said defendants procuring the transfer of the land to it by an outside party, one Siegert, ostensibly at the purchase price of $45,000, but at an actual cost to said defendants of $32,727, they dividing the difference between themselves as profits, without the knowledge of plaintiff and others similarly situated. The action was commenced against the promoters, Warner, Warner, and Wambold, and the corporation as well, and proper allegations made in the complaint to charge the latter as a party to the fraud. The relief prayed for was a rescission of the whole transaction, and a judgment against the defendants for the money paid by plaintiff upon the subscription to the stock of the corporation. The defendants demurred generally to the complaint. The demurrer was stricken out as frivolous, and defendants excepted. Thereafter answers were put in, and the issues thus formed tried and determined by findings and conclusions of law in substance as follows: (1) That January 1, 1892, defendants Warner, Warner, and Wambold formed a fraudulent combination to cheat plaintiff and others by selling to a corporation, of which said defendants were promoters, certain lands for $45,000, which they had secretly obtained the right to purchase for $32,727; and that in furtherance of their fraudulent scheme they represented to plaintiff and others, who, with him, were induced to unite in the enterprise, that the cost price of the land was $45,000, when in fact it was $32,727. (2) That plaintiff, relying upon such representations, and not otherwise, by a $3,000 subscription united with such defendants and others, who in the aggregate made up the entire subscription of $45,000 called for, the subscribers agreeing to take interests in the enterprise of purchasing the land corresponding to their respective subscriptions, such interests to be evidenced by stock in the proposed corporation; and that plaintiff became, by signing the agreement, an actual subscriber to the stock of the corporation to the extent of $3,000. (3) That after the corporation was organized certificates of stock to the whole amount were issued, and payment made therefor by plaintiff and those similarly situated, as required by the plan of organization, plaintiff paying on his $3,000 of stock, $1,120; that $7,200 of full–paid stock was issued to the said defendants Warner, Warner, and Wambold without any consideration being paid therefor. (4) That after the corporation was organized the said promoters, pretending that Siegert owned the land, caused themselves to be appointed by the corporation, at a meeting of stockholders, a committee to purchase the same from said Siegert for $45,000, upon the pretense on the part of said defendants, relied upon by plaintiff and others similarly situated, that he owned the land, and that such was his price; that in furtherance of the scheme said defendants caused Siegert to convey the land to the corporation by a deed expressing as the consideration one dollar and other valuable considerations, and represented that the true consideration was $45,000, part cash and part mortgage back on the premises, when in fact it was but $32,727, of which one–third was paid down out of the corporation funds paid in by the bona fide stockholders, and the balance covered by a mortgage back to Siegert; and that the balance of the funds of the corporation paid in by such bona fide stockholders, aggregating in all $23,700, was kept by said defendants Warner, Warner, and Wambold as profits, without the knowledge of plaintiff or others similarly situated. (5) That before the commencement of this action plaintiff notified defendants that he elected to rescind the contract to purchase the land and to take stock in the corporation, on the ground of fraud, and demanded a return of the $1,120 paid to the corporation, with interest thereon; also a return to plaintiff of his contract of subscription; and that he offered at the same time to turn over to defendants his certificates of stock; and that his demands were refused. (6) That the corporation, though a proper party, in no way participated in the fraud upon plaintiff, or is responsible therefor. Upon such facts the court concluded: (1) That Warner, Warner, and Wambold were promoters of the corporation, and its agents in the purchase of the land, and occupied such relation to it that they had no right to make any profit out of the purchase of the land, and that all profits made by them in such purchase were in breach of the trust, and contrary to equity. (2) That plaintiff is entitled to judgment rescinding the subscription to the purchase of the land and to the stock of the corporation upon reassigning to the promoters the certificates of stock in the corporation, and depositing the same with the clerk of the court for such promoters; and that plaintiff is entitled to judgment against said defendants Warner, Warner, and Wambold for the money paid to the corporation, $1,120, and interest thereon from the time it was so paid, with costs and disbursements; and that the defendant corporation is entitled to a dismissal of the action as to it, with costs. Exceptions were duly filed on behalf of defendants Warner, Warner, and Wambold, and they, after rendition of the judgment, appealed therefrom to this court.Orren T. Williams and Lyman G. Wheeler, for appellants.

N. S. Murphey, for respondent.

MARSHALL, J. (after stating the facts).

It is assigned, first, as error that the court erred in holding that the complaint states a cause of action. This is based on the theory of counsel for appellants that respondent's counsel purposed stating a cause of action to redress a wrong to the corporation, and that necessary allegations are wanting to justify the plaintiff, as a stockholder, in prosecuting such an action, in that there are no allegations to the effect that the corporation or its officers were requested to prosecute for the wrong, and that they refused to comply therewith, or that such a request, if made, would have been useless. That such allegations are requisite to such an action does not admit of question. Doud v. Railway Co., 65 Wis. 108, 25 N. W. 533;Palmer v. Hawes, 73 Wis. 46, 40 N. W. 676;Eschweiler v. Stowell, 78 Wis. 316, 47 N. W. 361; Pom. Eq. Jur. § 1095. But that principle clearly does not apply to this case. Appellants' counsel misconceived the character of the action. It was not intended by the complaint to state a cause of action in favor of plaintiff and others similarly situated to redress a wrong to the corporation caused by the fraudulent acts of Warner, Warner, and Wambold, but to state a purely personal cause of action in equity against them and the corporation, as parties jointly liable for fraudulent representations and conduct, whereby plaintiff was induced to subscribe for $3,000, par value, of the stock of the defendant corporation. The theory was that the fraudulent scheme was entered into by Warner, Warner, and Wambold, and was carried out to the knowledge of the officers of the corporation in such a way as to render it a guilty party thereto; hence that plaintiff had his election to remain a stockholder, and sue at law for damages, or to tender back what he received, and sue in equity for a rescission of the contract of subscription to the capital stock, and the agreement mentioned in the complaint, and for a return of the money paid on such subscription. He chose the latter, and no claim is made by appellants but that the complaint states a cause of action for such rescission, and none can be seriously made. The court, after properly holding that the complaint states a cause of action in equity for a rescission of the contract whereby plaintiff incurred the obligation to pay $3,000 for stock in the corporation, and paid thereon $1,120, proceeded to determine the rights of the parties in such a way that we cannot understand definitely upon what theory the judicial mind acted, consistent with any known rules of law or equity.

Many exceptions were taken by appellants to the findings of fact, but, in so far as such findings determine facts, properly so called, we are unable to say that there is not sufficient evidence to support them; therefore they cannot be disturbed. It is, in effect, determined that the stockholders of the company, at a regular meeting, in ignorance of the contemplated fraud of Warner, Warner, and Wambold, authorized them to purchase the land from Siegert for $45,000, in accordance with the plan of the promoters, upon which plaintiff's subscription was secured by such promoters; that thereafter such purchase was consummated, the land being transferred to the corporation ostensibly at a cost of $45,000, when in fact the cost of the property to such promoters was but $32,727; that they realized the difference as profits, without...