Mills v. Norris
| Decision Date | 11 February 1935 |
| Docket Number | 13998. |
| Citation | 179 S.E. 464,176 S.C. 1 |
| Parties | MILLS v. NORRIS et al. |
| Court | South Carolina Supreme Court |
Appeal from Common Pleas Circuit Court of Greenville County; J Henry Johnson, Judge.
Suit by Judson Mills, a corporation, against D. L. Norris and another, wherein defendants filed a counterclaim. From a decree for plaintiff, defendants appeal.
Reversed and remanded with instructions.
The decree of Judge J. Henry Johnson, which was directed to be incorporated in the report, follows:
This controversy arises out of the purchase by the defendants from the plaintiff of 3,000 shares of common stock in Shambow Shuttle Company of the par value of $50 each at the credit price of $60 per share, for which the defendants gave their five notes, with pledge of the stock, payable in installments of $20,000 each on January 1, 1928, 1929, 1930, and 1931, and balance, $100,000, on January 1, 1932, all bearing interest at 6 per cent. The installments of principal and interest falling due January 1, 1928, and 1929 were paid. The interest and $10,000 of the principal which fell due January 1, 1930 was likewise paid. No other payments have been made on said notes, but the defendants repeatedly promised to make payment until finally in June, 1931, after the notes were placed in the hands of attorneys for suit, the defendants for the first time claimed that they were induced to purchase the stock by fraudulent misrepresentations as to the financial condition of Shambow Shuttle Company, and demanded cancellation of the sale, return of their notes, and the purchase price with interest.
Suit was instituted for the foreclosure of the pledge of the stock and for judgment, and the case, being at issue, was referred to the master to take the testimony. Voluminous records consisting principally of auditors' statements, were introduced and certain oral testimony taken, all of which were reported by the master. The case came on to be heard before me at the term of court just ended. Nearly three days were consumed in taking the testimony and hearing of argument. I have given to the case very careful consideration and have reached the conclusions hereinafter indicated.
The Shambow Shuttle Company is a corporation chartered under the laws of Rhode Island and is engaged in the business of manufacturing shuttles for cotton mills. At the time of this transaction, its capital stock consisted of-
| 1,800 shares of preferred stock of the par value of $100.00 per share .......................................................... | $180,000.00 |
| 4,000 shares of common stock of the par value of $50.00 per share .. | 200,000.00 |
| ------------ | |
| Total capital stock .......................................... | $380,000.00 |
The preferred stock was without voting power so that the entire stock control of the corporation was in the common stock. The ownership of the common stock was in Judson Mills and its treasurer, B. E. Geer, Judson Mills owned 3,000 shares and B. E. Geer 1,000 shares.
Norris and Cox had for many years been engaged in the business of manufacturing and selling blocks of dogwood, etc., which were used in the manufacture of shuttles. Cox lived at High Point, N. C., but Norris lived and conducted a part of his business in Greenville. Judson Mills is in the outskirts of Greenville and both Norris and Geer live in Greenville and frequently see each other.
The defendants charge that false and fraudulent representations as to the condition of Shambow Shuttle Company were made by Geer and H. H. Ullman, the president of Shambow Shuttle Company, and they allege that both of these men were agents of Judson Mills in effecting the sale of the stock. They charge that during the negotiations the financial statement of December 31, 1926, prepared by Elliott, Davis & Co., a firm of accountants and auditors, with offices in Boston and Greenville, was presented to them and represented to be correct, and they claim that this statement is false in the following particulars: (1) That the value of the blocks, stores, parts, finished goods sold on firm orders, finished goods in stock, and other assets was not correctly stated, but that they were worth $150,000 less than shown on said statement; that a large part of the assets were overvalued and should have been charged off, and were subsequently so charged off; and that a large part of the goods stated to have been sold on firm orders had not been so sold; (2) that the valuation of fixed assets at $300,333 was incorrect in that these assets on the organization of the corporation in 1921 had been arbitrarily raised by the sum of $145,000 above actual value; (3) that the sum of $3,150 indicated on the statement as a reserve for dividends had not been earned; (4) that the surplus of $188,466.59 shown on said statement had been created-not by earnings, but by the surrender of common and preferred stock to offset losses which amounted to $245,000; (5) that the stock shown on the financial statement as having a book value of $97 per share was in fact valueless.
The witnesses for the defendants admitted that Mr. Geer is one of the leading business men in Greenville and a man of the highest character, and that Elliott, Davis & Co., as accountants and auditors, bear a very high reputation for honesty and ability.
Norris' version of the negotiations leading to the purchase of the stock is as follows: That in October, 1926, Ullman, the president of Shambow Shuttle Company, in Greenville, suggested to him that the stock might be purchased at the price of $50 and upwards per share; that following this conversation he had several conferences with Ullman; and that in one of these Ullman gave him a financial statement as of November 30, 1926, and gave him other information with regard to the value of the plant and business. He says that he understood that Ullman was representing Geer or Judson Mills in these negotiations. Norris got in touch with Cox, and these two had a conference with Ullman at Cox's home in High Point. They were interested in the matter and Norris then had an interview with Geer, and some days later had another interview with Geer, and Geer then gave him the option dated January 22, 1927, and extending to January 31, 1927, to purchase the 3,000 shares at the price of $54 cash per share or $60 on credit, as stated in the option.
Having procured this option, Norris, Cox, and Ullman held a conference which resulted in their entering into a contract dated January 29, 1927, whereby they associated themselves for the purpose of purchasing the common stock and for the control of the business of Shambow Shuttle Company for the period of ten years. This contract recited that it was the purpose of Norris and Cox to purchase 3,000 shares and of Ullman to purchase 1,000 shares, with the understanding that an agreement should be made by Shambow Shuttle Company and Ullman, whereby the latter would serve as president, general manager, and sales manager for the period of ten years ending December 31, 1936, and the business to be under his control, subject to a board of three directors, one selected by Norris and Cox, one by Ullman, and a third to be acceptable to both parties, and stipulating that neither party should sell his interest in the stock without giving the other the opportunity to purchase; any disagreement to be referred to arbitrators, whose decision should be final. Having entered into this contract, Norris saw Geer and told him that he and Cox would accept the option on two conditions, to wit, (1) that he would sell Ullman the remaining 1,000 shares at the same price; (2) on the further condition that Shambow Shuttle Company would enter into the ten-year contract with Ullman, embracing the terms heretofore stated. Geer, after some consideration, accepted these terms, and on February 1st, the contract of sale which has been introduced in evidence between Judson Mills and Norris and Cox was executed. At a later date, probably about February 20, 1927, the purchase was closed, and Norris and Cox executed their five notes dated January 1, 1927, for the purchase price, $180,000, payable at the times and on the terms as shown by the complaint, and this was followed by the sale of the 1,000 shares to Ullman on credit.
Norris and Cox, being engaged in the business of selling blocks to shuttle companies, and apprehending that if their connection with Shambow Shuttle Company were known, it might interfere with their business, asked Mr. Geer to represent them on the board of directors. So that Geer, Ullman, and M. J. Offers, the treasurer of Shambow Shuttle Company, were elected directors, and, in pursuance of the contract with Norris and Cox, Ullman was elected president, general manager, and sales manager.
After the purchase, Norris and Cox gave Ullman an option on their 3,000 shares extending over a period of years, at a price beginning at $75 per share, and with yearly increases at the rate of $18 per share.
During the month of January, probably before the notes were executed, Norris visited the plant at Woonsocket, discussed the business of the company with Ullman, and went over the entire plant. On his return to Greenville, he made no complaint either as to the plant, its assets, or the business of the company. Nor were any complaints made until June, 1931. Monthly statements as to the operations of the business and detailed annual statements were prepared by the auditors and submitted to Norris and Cox. Norris made frequent visits to the plant and he and Cox kept in close touch with the business of the company through contact with Geer and the president of the corporation.
It appears that Ullman's management was not satisfactory to Geer, Cox,...
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