Porter v. Morris

• Citation: 199 S.W. 106,131 Ark. 382
• Decision Date: 26 November 1917
• Docket Number: 3
• Parties: PORTER v. MORRIS
• Court: Supreme Court of Arkansas

199 S.W. 106

PORTER v. MORRIS

131 Ark. 382

No. 3

Supreme Court of Arkansas

November 26, 1917

Appeal from Pulaski Chancery Court; John E. Martineau, Chancellor affirmed.

Cross-appeal dismissed, and decree affirmed.

Carmichael Brooks & Rector, for appellants.

1. No fraud nor misrepresentations were proven in the sale of the stock to Morris. 47 Ark. 165; 125 U.S. 247-250 L. Ed.; 31 Id. 678; 20 Id. 627; 150 U.S. 665, 673; 5 Pet. 264; 1 Wheat 175; 111 U.S. 549; 37 L. R. A. 605; 80 Am Dec. 172; 160 S.Ct. 582; 91 Ark. 324.

2. The stock was fully paid and non-assessable as to Morris. 56 Ark. Law Rep. 229, 236; 10 Cyc. 701-2; 134 S.W. 1066; 95 Ark. 124; 4 Thompson on Corp., § 3431; 45 L. R. A. 647.

John W. Wade, for appellee.

1. The stock was sold appellee by false and fraudulent representations. 1 Cook on Corp. 410-11-12 and note 7, 419, 2397; 10 Cyc. 428; 33 L. R. A. (N. S.) 721, note.

2. The corporate statute was fraudulent. Kirby's Digest, §§ 38-9, 845; 139 U.S. 417; 71 Ark. 383; 135 F. 159; 36 Tex. Civ. App. 317; 127 Ala. 513; 51 W.Va. 341; 90 Va. 533; 1 Cook. Corp., par. 325, 342, note 1 (1867).

3. Appellee's transferers were his fiduciaries. 71 Ark. 277; 18 A. & E. Ann. Cas. 354.

4. Appellee was made to believe he was getting treasury stock and that the price would go into the treasury. There was failure of consideration. The concern was a failure and the whole scheme a fraud. On the cross-appeal appellee should be awarded the stock at least.

OPINION

McCULLOCH, C. J.

Appellee Morris purchased shares of stock in a domestic corporation known as the Pike County Water Power Company, and executed his notes for the amount to be paid for the stock. The present litigation involves two actions, one instituted against appellee to recover the amount of two unpaid notes and the other an action instituted in the chancery court of Pulaski County by appellee against certain parties to cancel the purchase of the shares of stock and the unpaid notes executed by appellee for the price. The two actions were consolidated and proceeded to a final decree in the chancery court of Pulaski County.

The domicile of said corporation was at Murfreesboro, Arkansas, with offices in the city of Little Rock. The parties who became interested in the organization of the corporation, Cox, Showers, Jones, Holman and Bain, conceived the plan of purchasing a tract of land, containing 185 acres, near Murfreesboro, on which was located a body of water with fall sufficient to develop considerable power, and organizing a corporation to develop this power and sell the same for commercial and industrial uses. In other words, the plan was to develop and operate a hydro-electric water power plant, for the purpose of furnishing power to the cities and towns in western and central Arkansas. One of the promoters of the scheme, Bain, was interested in the tract of land, in that his wife owned an interest by inheritance from her father. Pursuant to this plan, the parties mentioned purchased the tract of land, paid therefor the sum of $ 925, and organized the corporation, with authorized capital stock of $ 1,000,000, of which $ 600,000 was issued to the promoters mentioned above and two other gentlemen, who are practicing attorneys, and who received each a large block of stock for his services as attorney. The capital stock was divided into shares of the par value of $ 5 per share. None of these parties paid into the treasury of the corporation any money in consideration of the issuance of the stock, but the testimony is to the effect that some of them expended sums of money in procuring the services of an engineer and in paying the expenses of issuing and distributing the printed prospectus. Four of the parties named, Showers, Cox, Jones and Holman, sold to appellee 4,000 shares of their stock, of the par value of $ 20,000, for the amount of one-third of the par value of the stock, and appellee executed his four promissory notes, each for the sum of $ 1,666.66. Instead of transferring the stock to appellee, they surrendered the shares of stock to the corporation, and caused the secretary to issue 4,000 new shares of stock direct to appellee. Said promissory notes were executed by appellee to his own order and endorsed in blank, and were delivered to the four parties just named, who each took one of the notes. Cox and Showers each assigned the respective notes held by them to local banks, and appellee subsequently paid the same after the institution of the present litigation.

The notes to Jones and Holman were not paid at maturity, and appellee executed new notes in renewal, payable directly to Jones and Holman, respectively, and they transferred the notes to the Jones House Furnishing Company, a corporation with which they were connected as directors. The Jones House Furnishing Company instituted an action against appellee in the Pulaski circuit court on the two notes after maturity; but subsequently, and while the action was pending, assigned the notes to another corporation, which became insolvent, and appellant Porter became the purchaser of the notes at a receiver's sale, and on his own petition was joined as a party to the action. Appellee then instituted the suit in equity against Showers, Cox, Jones, Holman, the Jones House Furnishing Company, and the Pike County Water Power Company, to cancel the notes and rescind the contract of sale of the stock. These are the two suits that were consolidated and tried together.

Appellee alleged in his complaint that he was induced to purchase the stock by the false and fraudulent misrepresentations of the parties who negotiated the sale of the stock, concerning the financial status of the corporation and the prospect of developing the same into a profitable enterprise. The proof taken in the case shows that the sale was negotiated by Showers, who was employed by the other three interested stockholders to sell the stock; that Showers employed a man named Abbott to assist him in selling the stock, and that Abbott was the man who first enlisted the interest of appellee in the purchase.

The answer in the case contains a denial of the charges of fraudulent misrepresentations; and the chancellor decided that issue in favor of appellee and rescinded the sale and canceled the two unpaid notes.

We are of the opinion that the decision of the chancellor is correct. It is true the testimony does not show that any definite misrepresentations were made to appellee concerning the value of the property of the corporation; but it is sufficient to warrant the conclusion that there were misrepresentations concerning the true financial condition of the corporation and of its ability to develop into a going concern of the magnitude indicated in the prospectus and with prospects as represented to appellee. There are two points upon which appellee claims that there were misrepresentations: One that he was buying treasury stock from the corporation, and not shares of stock previously issued to other...