Preston v. Jeffers

• Decision Date: 19 February 1918
• Citation: 179 Ky. 384,200 S.W. 654
• Parties: PRESTON ET AL. v. JEFFERS.
• Court: Kentucky Court of Appeals

200 S.W. 654

179 Ky. 384

PRESTON ET AL. v. JEFFERS.

Court of Appeals of Kentucky.

February 19, 1918

Appeal from Circuit Court, Franklin County.

Action by J. W. Jeffers, receiver of the Central Life Insurance Company, against John H. Preston and others. From judgment for plaintiff, defendants appeal. Affirmed.

J. P Hobson & Son, of Frankfort, for appellant Preston.

T. B McGregor, of Frankfort, and W. R. McCoy and A. Copley, both of Inez, for appellant Copley.

H. V McChesney and Scott & Hamilton, all of Frankfort, for appellee.

THOMAS J.

In a proceeding instituted by the insurance commissioner of the state of Kentucky, pursuant to the provisions of section 753 of the Kentucky Statutes, the appellee Jeffers was appointed receiver of the Central Life Insurance Company, a corporation organized under the laws of Kentucky in 1911 for the purpose of conducting a general life insurance business. After his appointment the receiver qualified as such and took charge of the affairs of the company. He then instituted this proceeding against the appellants Preston and Copley to recover from them on certain notes which they had executed to the insurance company in payment of stock for which they had subscribed. The appellants and defendants filed separate answers in which they each urged as a defense fraud on the part of the company in procuring their respective subscriptions to the stock, and the execution of the notes sued on. The fraud and misrepresentations relied upon, as specified in the answer of the defendant Preston, were: (a) That the company represented to him at the time that it would establish a branch office at his home town of Paintsville and put him in charge of it as its agent at a salary of $3,600 per year, that it had failed and refused to do this and never intended to do so, that he relied upon it and was induced to make his subscription and execute his notes, and that this was the consideration for his doing so; (b) that the company a short while before the appointment of the receiver wrongfully and fraudulently through its officers and agents surrendered notes which various subscribers had executed to it, aggregating the sum of at least $50,000, to the makers, and that this was done without consideration and without authority; (c) that he paid or agreed to pay for his stock $10 per share (the par value being $5 per share) upon the representations made to him by the agent selling the stock that the company had a surplus, and that the stock was in reality worth the amount agreed to be paid, and that it would regularly pay handsome dividends; (d) that it was agreed at the time that the defendant would not be called upon to pay his notes, but that they would be taken up with the dividends which his stock would earn and which the company would apply as earned to the extinguishment of his notes, and that the promise to do this was also a part of the consideration inducing him to execute the notes. He further alleged that the matters stated as constituting part of the consideration were omitted from the note or the subscription through fraud or mistake, and he now insists that he be permitted to cancel his subscriptions and the notes executed in payment thereof because of the facts alleged. This defendant also sought to put in issue the fact of the company being insolvent or that its indebtedness exceeded its assets other than stock subscriptions.

The answer of the defendant Copley relied upon some of the matters alleged in the answer of Preston, except that he was not promised a fat salary as agent in charge of another branch office to be established at the place of his residence; neither did he question the solvency of the corporation, but he relied upon the additional allegation that after he had executed his notes the president of the company agreed with him in consideration that he pay a part of them to cancel and surrender to him the note upon which he is sued; that he made the payment, but the note was not surrendered to him, although he afterwards labored under the impression that it was canceled, and that he was no longer liable. Each of the defendants also alleged that no stock was ever delivered to them, and through want of knowledge or information sufficient to form a belief they denied that any was ever issued. To each of the answers as amended demurrers were sustained, and, defendants declining to plead further, judgments were rendered against them for the sums sued for, and, questioning the correctness of those judgments, they each prosecute this appeal.

Before considering other defenses, it might be well enough to dispose of the last one referred to, i. e., that no stock was issued, or, if so, none delivered to the defendants. The notes, as well as the subscriptions for the stock, are filed as exhibits, and the latter show that the stock to be issued should be in lien to the company as security for the payment of the subscriptions, and the notes expressly show that the certificates of stock were held by the company as collateral security for the indebtedness. This would at least account for the fact that no certificate was delivered to either defendant, since it was retained by the company until the indebtedness was paid. But, disregarding this, the rule is well settled that in a suit to recover calls for subscription to stock the fact that no certificate had ever been issued by the company furnishes no defense. Setting forth this rule, it is stated in Thompson on Corporations (2d Ed.) vol. 1, § 774, that:

"Hence it may be stated as a general rule that the mere failure to issue a certificate does not release the subscriber, and is no defense by him to an action on his subscription."

The reason for the rule as stated by the author of that work and other authorities is that the issuance of a certificate is not necessary to the completion of the transaction; the certificate being only evidence of the ownership of the stock. The owner's rights as a stockholder are just as great without the issual of a certificate as with it; the only difference being that in some instances he might have greater difficulty in establishing the fact that he was in truth a stockholder. This rule has been recognized by this court in the cases of Wight v. Shelby Railroad Company, 16 B. Mon. 4, 63 Am.Dec. 522; Shelbyville Trustees v. Shelbyville & E. Turnpike Co., 1 Metc. 54; and Smith, etc., v. Gower, 2 Duv. 17.

Turning now to the other defenses which it is alleged constituted fraud in the procurement of the subscriptions and the execution of the notes, we find the rule to be that the alleged defrauded subscriber in such cases must move within a reasonable time after the opportunity to discover the fraud to obtain relief either by reformation of his contract or a cancellation of it, else he will be guilty of laches which will deprive him of the benefits of the alleged fraud. This is peculiarly and especially the rule after the corporation has become insolvent and is in process of liquidation for the purpose of collecting its assets and disbursing the proceeds among those entitled thereto. This is true whether the liquidating process be a voluntary one such as an assignment for the benefit of creditors, or whether it results from a court proceeding instituted for that purpose, as in the case of the appointment of a receiver at the instance of one having a right to do so. These general rules governing the right of a subscriber for the stock to avail himself of fraud practiced upon him in obtaining his subscription when sued thereon are of universal recognition, and will be found stated in 29 Amer. & Eng. Ency. of Law, pp. 937-939; 10 Cyc 421-423; 7 R.C.L. 238; Reid v. Owensboro Savings Bank & Trust Company's Receiver, 141 Ky. 444, 132 S.W. 1026; Robertson v. Owensboro Savings Bank & Trust Company's Receiver, 150 Ky. 50, 149 S.W. 1144; Little v. Same, 150 Ky. 331, 150 S.W. 334. These authorities, and especially the cases referred to from this court, hold that, if the shareholder has been vigilant in discovering fraud, and has been guilty of no laches in taking the necessary steps to obtain relief from it, he will not be denied the defense, although proceedings may have been instituted for the purpose of winding up the affairs of the corporation because of its insolvency. But the cases from this court further hold that, if the delay on the part of the shareholder to bestir himself to discover the fraud and to obtain relief because of it has been such as to charge him with laches, he cannot, as against the rights of creditors of an insolvent corporation, rely upon the fraud as a defense in a suit to collect his subscription or a note executed therefor. In the Reid Case, supra, the defendant, who was the sued stockholder, in support of his defense of fraud (which is similar to that urged here) relied upon the case of ...