King v. Livingston Mfg. Co.

• Decision Date: 20 May 1915
• Docket Number: 578
• Citation: 192 Ala. 269,68 So. 897
• Parties: KING v. LIVINGSTON MFG. CO. et al.
• Court: Alabama Supreme Court

68 So. 897

192 Ala. 269

KING v. LIVINGSTON MFG. CO. et al.

No. 578

Supreme Court of Alabama

May 20, 1915

Appeal from Chancery Court, Sumter County; Thomas H. Smith Chancellor.

Suit by R.L. King against the Livingston Manufacturing Company and others. From a decree sustaining a demurrer to the amended bill, complainant appeals. Reversed and decree entered overruling the demurrer, and remanded.

Patton & Patton and Thomas F. Seale, both of Livingston, and Henry Upson Sims, of Birmingham, for appellant.

J.A Mitchell and A.G. & E.D. Smith, all of Birmingham, for appellees.

SOMERVILLE J.

When this case was before us on a former appeal (King v Livingston Co. et al., 180 Ala. 118, 60 So. 143), we construed the bill as claiming damages for a deceit which was of purely legal cognizance; but the equity of the bill was upheld by reason of the discovery sought. On that appeal we held all the grounds of demurrer bad, except one, which ground pointed out the omission of the bill to charge that the false representation by the company's agent, Smith, as to its financial condition, was made to complainant for the purpose of inducing him to invest in the new issue of corporate stock, as he, in fact, did about six months later. At that time, by amendment of the original bill, complainant was seeking redress only against the company and its manager and director, Smith. Since then the bill of complaint has been materially amended both as to its allegations and prayers. As now framed, it seeks to compel the directors of the company to pay into the treasury the value of corporate assets which have been lost through their negligent management of its affairs, and asks for a decree for the corporation's repayment to complainant of the $3,000 paid by him for his purchase of corporate stock, with a preference over the claims of the directors against the company. It further prays for a personal decree against the directors for any balance remaining due to complainant after the ratable distribution of corporate assets.

It must be observed that the gravamen of the bill, as it now stands, is not, as formerly, a claim for damages for a deceitful misrepresentation as to the earnings and prosperity of the company, but for a fraudulent concealment of its embarrassments and actual insolvency at the time complainant was invited to subscribe for the 30 additional shares of stock, and when he accepted the invitation and paid the money therefor to the company's treasurer. The theory of the bill is, and it is fairly supported by its allegations, that the directors, knowing the insolvent condition of the company, and being themselves its chief creditors, sent out or authorized to be sent out continued reports of its prosperity, and also authorized dividends to be falsely declared, in order to deceive ignorant stockholders, and then, knowing these stockholders had thereby been given a totally false impression as to the condition of the company, they invited and received from them subscriptions and money for a new issue of stock; the ultimate aim being the liquidation of directors' claims against the company, and not a bona fide rehabilitation of its business.

"A court of equity has concurrent jurisdiction with a court of law in enabling a purchaser of stock to recover back money paid where the purchase was induced by fraud chargeable to the vendor. The remedy in equity *** is by a bill to set aside the whole transaction. *** It is not necessary for the complainant to prove a fraudulent intent. Innocent acts or misrepresentations suffice for this purpose, although they would be insufficient to sustain an action for deceit." Cook on Corporations (4th Ed.) § 356; 10 Cyc. 848.

The relation of directors to stockholders is not technically that of trustees. Nevertheless, for the purposes here pertinent, it is undoubtedly a relation of trust and confidence (see Wolfe v. Underwood, 96 Ala. 329, 331, 11 So. 344), and we think it was the clear duty of these directors, under the conditions shown, to inform stockholders of the losses of the business and the insolvency of the company, as to which they were known to have been misinformed, before or at the time of inviting and receiving further investments of their money in corporate stock. These were facts which such stockholders had a right to know, and as to which the omission to inform them was a fraudulent concealment, both as to the corporation and as to its agents who shared therein. Corry v. Silva y Cia., 68 So. 891; Delano v. Case, 121 Ill. 247, 12 N.E. 676, 2 Am.St.Rep. 81. "There is no obstacle to bringing an action of this kind both against the directors and the managers, if both concurred in committing the fraud." 10 Cyc. 849. And, of course, these may be sued jointly with the corporation. 10 Cyc. 324, and cases cited.

A further theory of the bill is that these directors knowingly accepted the benefit of the company's fraud by receiving complainant's money in payment pro tanto of their own claims against the company. Although, as a general rule, a corporate agent who directly commits a wrong for his principal is not the agent of the corporate directors, and the rule of respondent superior does not apply, yet "where the directors personally and knowingly derive a benefit from the fraud of the subagent, they may be held liable on the ground that he became in a sense their agent." 10 Cyc. 827.

We are of the opinion that the bill exhibits a meritorious complaint against the defendant company, and also against the manager and directors individually, and supports the prayer for repayment by them to complainant of the $3,000 paid by him for worthless corporate stock. The leading case of Tyler v. Savage, 143 U.S. 79, 12 Sup.Ct. 340, 36 L.Ed. 82, is strongly analogous, and fully supports the general equity of the bill and the propriety of its prayers.

One objection to the present bill is that the last amendment works a departure. The amendment does, in fact, alter the theory of the bill, but its substance remains unchanged, and its purpose single and identical, viz., the recovery of the money paid by complainant for worthless stock. We think there is no departure. A., T. & I.C. v. Hall & Farley, 152 Ala. 262, 44 So. 592; Sims' Ch. Pr. § 348.

Another objection is that complainant does not appear to have offered to return the stock purchased by him to the defendants, or either of them, within a reasonable time after the discovery of the alleged fraud. A party to a contract cannot himself rescind it for the other's fraud without offering to restore any consideration of intrinsic value received and held by himself. Rice v. Gilbreath, 119 Ala. 424, 24 So. 421; Hafer v. Cole, 176 Ala. 242, 57 So. 757. In the present case the certificate of stock is without value, and the rule does not apply.

Moreover, in cases of actual fraud, a court of equity will not in general require such restoration, or offer thereof, by the complainant before the filing of his bill for rescission. Garner v. Leverett, 32 Ala. 410; Martin v. Martin, 35 Ala. 560; Perry v. Boyd, 126 Ala. 162, 28 So. 711, 85 Am.St.Rep. 17. This objection is without merit, and the bill, in fact, offers to do full equity.

The bill is not multifarious, since, as already noted, its purpose is single. The corporation is insolvent, and its assests are in the hands of a receiver pending its dissolution under the decree of the chancery court in a separate proceeding. The prayer for relief against negligent directors for the benefit primarily of the corporation is subsidiary merely and in aid of the main purpose of the bill, which will be more effectually and speedily accomplished by the collection here of all corporate assets. The method of procedure here followed is w ithin the flexible and adaptable powers of chancery courts, and finds apt precedent in the case of Tyler v. Savage, 143 U.S. 79, 97, 98, 12 Sup.Ct. 340, 36 L.Ed. 82. And see, also, Patterson v. Stewart, 41 Minn. 84, 42 N.W. 926, 4 L.R.A. 745, 16 Am.St.Rep. 671.

It is not the duty of a stockholder to investigate the management of the corporation, nor to discover and correct the incapacity of its managing officers. 10 Cyc. 834; Hence, unless the stockholder is shown to have had knowledge of such things, he cannot be said to have acquiesced therein by his failure to protest. The bill does not show such knowledge, and hence it is available to defendants only as a matter of affirmative defense.

It appears that an appeal to the company, either through its officers or...