Frost v. Arnaud

• Decision Date: 13 August 1915
• Docket Number: (No. 511.)
• Citation: 85 S.E. 1028,144 Ga. 26
• Parties: FROST. v. ARNAUD et al.
• Court: Georgia Supreme Court

85 S.E. 1028

144 Ga. 26

FROST.

v.ARNAUD et al.

(No. 511.)

Supreme Court of Georgia.

Aug. 13, 1915.

(Syllabus by the Court.)

Error from Superior Court, Fulton County; W. D. Ellis, Judge.

Action by W. E. Arnaud and others against Johnathan B. Frost and others. There was a judgment overruling his demurrer, and defendant named brings error. Reversed.

W. E. Arnaud and others brought suit against Johnathan B. Frost and J. M. Bishop of Fulton county, and Thomas J. Shanley of the state of Montana, to recover money alleged to have been paid to them by the plaintiff in connection with the promotion of a corporation. The petition (filed on September 30, 1912) alleged as follows: On September 30, 1905, Shanley entered into a contract with J. P. Brooke, whereby Brooke agreed to sell to Shanley certain described mining property located in Gwinnett county, Ga.; in which contract it was stipulated that, if the mine should be operated during a stated period, 25 per cent. of the ore mined should be paid on the purchase price. Thereafter Shanley associated with himself Bishop and Frost for the purpose of promoting a corporation to take over the mining property under Shanley's contract, and, with certain other persons, applied for and obtained, on September 20, 1906, from Fulton superior court, a charter for a corporation to be known as the Suwanee Gold Mines Company. In the application for charter it was recited that the minimum capital stock was fixed at $1,000,-000, divided into 1, 000, 000 shares of the par value of $1 each, and that 10 per cent. of the capital stock, $100,000, had been actually paid in. Immediately after the procurement of the charter, Frost appropriated to himself 50, 000 shares of the capital stock of the company, and afterwards received 50, 000 additional shares of stock, and Bishop appropriated to himself 50, 000 shares of the stock, which stock was issued to Frost and Bishop in consideration of services to be performed by them in procuring sufficient capital to pay for the mining property and to begin the mining operations. Shanley appropriated to himself 225, 000 shares of the stock in consideration of transferring to the corporation his rights under his contract with Brooke. Inreality there was no consideration flowing to the corporation for the stock, because Frost and Bishop did not procure the capital, but only $S, 152.50 thereof, including the amount received from petitioners, and because the contract itself was without market value.

"The defendants entered into a conspiracy to sell to the public, including petitioners, so much additional stock as should be necessary to pay the purchase price of said mining property under the terms of said contract between the said Brooke and said Shanley, to wit, $40,-000, and so much more of such additional or treasury stock as should be necessary to put in operation the mines on said property, to wit, $10,000 or less, reserving to themselves enormous blocks o£ stock appropriated to themselves as aforesaid."

For the purpose of inducing petitioners to buy stock in the corporation, the defendants resorted to false and fraudulent artifices, by verbally stating to petitioners that the Suwanee Gold Mines Company owned in fee simple all of the mining property contracted to be purchased from Brooke, and that every dollar they invested would purchase its equivalent in an undivided interest in land owned by the company, exclusive of valuable gold mines thereon; by representing in the application for charter that $100,000 had been actually paid into the company's treasury; by concealing from petitioners the fact that defendants had issued to themselves 375, 000 shares of stock; by dumping thousands of tons of auriferous dirt into a gulch and washing therefrom most of the sand, so that upon inspection of the property it would appear that the placer deposits of gold were much richer than in truth they were.

By means of such false and fraudulent artifices, your petitioners, relying thereon, on January 12, 1907, purchased from defendants 1, 000 shares, and paid therefor the sum of $900. Petitioners did not know of the fraud so perpetrated on them by the defendants until August 1, 1912, when Arnaud was informed by Brooke that on September 30, 1910, Frost took to himself a deed to all of the mining property which Brooke contracted to sell to Shanley. Petitioners by the exercise of ordinary care could not have discovered the imposition so practiced upon them, and they were lulled into a sense of security by reason of the relation of trust and confidence between them and the defendants which rendered it their duty to disclose the truth. Petitioners were deterred from discovering the fraud or suspecting that any fraud had been perpetrated upon them.

"Petitioner [Arnaud], often within four years next after the purchase of said stock, approached said defendants for information as to the progress said company was making in the development of its mines and business, and was at all times assured that said company would soon be paying dividends, and that the stock, including petitioner's, was constantly enhancing in value; and at all such times defendants fraudulently concealed from petitioner the truth of the matters set forth in paragraph 6 of this petition, notwithstanding they well knew that petitioner relied on said representations in purchasing his said stock. Petitioner intrusted defendants with his money to be used in connection with that of other subscribers whose aggregate subscriptions should amount to the capitalization required by the charter of said company in developing and putting into complete operation said mining properties; and there was no specified time in which this should be done, four years being a reasonable time therefor."

The defendants were thus in possession of petitioner's money, using it, as he supposed, for his...