Reid v. Owensboro Savings Bank & Trust Co.

• Decision Date: 06 January 1911
• Citation: 141 Ky. 444,132 S.W. 1026
• Parties: REID v. OWENSBORO SAVINGS BANK & TRUST CO. et al. [1] ROBERTS v. SAME.
• Court: Kentucky Court of Appeals

132 S.W. 1026

141 Ky. 444

REID v. OWENSBORO SAVINGS BANK & TRUST CO. et al. ^[1]

ROBERTS v. SAME.

Court of Appeals of Kentucky.

January 6, 1911

Appeals from Circuit Court, Daviess County.

Actions by the Owensboro Savings Bank & Trust Company and another against Allen Reid and against M. L. Roberts. From a judgment for plaintiffs in each action, defendant in each action appeals. Reversed as to the first action, and affirmed as to the other.

George W. Jolly, for appellants.

R. S Todd and R. A. Miller, for appellees.

CARROLL J.

These two appeals present the same questions of law, except in one particular, and will be disposed of together. In January 1906, the appellant Allen Reid bought of the appellee bank 10 shares of its capital stock, of the par value of $100, and paid therefor $1,500; and in January, 1907, he purchased of the bank 40 shares of its capital stock, of the par value of $100, paying therefor $7,000. The appellant M. L. Roberts in January, 1906, purchased from the bank 4 shares of its capital stock, of the par value of $100 each, and paid the bank for it $600, and in July, 1906, she bought of James H Parrish, president of the bank, 6 shares of its capital stock, of the par value of $100 for which she paid him $900.

In June, 1906, December, 1906, January, 1907, and December, 1907, the bank paid to appellant Reid on the stock held by him dividends aggregating $600, and to appellant M. L. Roberts on the stock held by her dividends aggregating $170. In April, 1908, the bank becoming insolvent, a receiver was appointed, and actions were brought in December, 1908, against Reid and Roberts to recover from them the dividends paid, upon the ground that at the time of the payment of these dividends, and each of them, the bank was insolvent. That the dividends were paid in violation of section 596 of the Kentucky Statutes (Russell's St. § 2185) is freely admitted, and so the right of the receiver to maintain an action to recover them is not questioned. Grant v. Southern Contract Co., 104 Ky. 781, 47 S.W. 1091, 20 Ky. Law Rep. 960; Lexington, L. F. & M. Co. v. Page, 17 B. Mon. 412, 66 Am.Dec. 165; Grant v. Ross, 100 Ky. 44, 37 S.W. 263, 18 Ky. Law Rep. 597; Cook on Stockholders, vol. 1, § 548; 3 Thompson on Corporations, § 3555.

But, for defense to the suit brought against him, Reid in his answer averred that in May, 1906, he deposited, in and loaned to the bank $2,000, which amount was or should have been on deposit in the bank when it went into the hands of the receiver, and he pleaded this deposit as a set-off and counterclaim against the action to recover the dividends. In addition to this defense made by Reid, he and M. L. Roberts pleaded that they were induced to and did purchase the shares of stock in the bank by the false and fraudulent representations as to the condition of the bank and the value of its shares of capital stock made by the president and officers of the bank. They averred that at the time they purchased the stock the bank was in fact insolvent, and that its condition was unknown to them. They each tendered to the receiver the shares of stock issued to them, and asked, that the contract be rescinded and that they have judgment for the amount paid for the stock, less the dividends paid to them, or that the amount paid by them, less the dividends, be treated as a claim against the bank. As the real purpose of this defense was to obtain a rescission of the contract upon the ground of fraud, we will so treat it, and not further allude to the doctrine of equitable set-off presented in argument. General demurrers filed to these answers were sustained by the lower court, upon the ground that the answers did not present a defense to the action, and, declining to plead further, judgment was rendered against the appellants for the dividends respectively received by them.

We will take up and determine first the question of the right of the appellants to have a cancellation of the stock, and a judgment for the return of the money paid by them, less the dividends received. In disposing of this question it may be conceded that when the stock was purchased the bank was insolvent, and that neither of the appellants knew this fact, and further conceded that they were induced to and did purchase the stock by reason of the false and fraudulent representations as to the value of the stock made to them by the president and officers of the bank, and that they in good faith believed at the time of their purchase that the bank was a solvent and prosperous institution and its stock reasonably worth the amount paid for it, which was largely in excess of its par value. Assuming this much as true, it may further be admitted that if the bank had not gone into insolvency, or the rights of depositors and creditors would not be prejudicially affected, these stockholders would have the right to a cancellation of their shares and a return of the money paid for them, as it is well settled that, when a purchaser of shares of stock in a bank or other corporation is induced to make the purchase by reason of the false and fraudulent representations of the officers and directors of the corporation that the concern is solvent and the shares worth the amount at which they are offered to be sold, the purchaser may, upon the discovery of the fraud, if action is brought within seasonable time and during the solvency of the corporation, have a cancellation of the stock and a return of his money. Upon this point there is practical agreement among the authorities, as may be seen by an examination of Fear v. Bartlett, 81 Md. 435, 32 A. 322, 33 L.R.A. 721, and note; Chamberlain v. Trogden, 148 N.C. 139, 61 S.E. 628, 16 Am. & Eng. Ann.Cas. 177, and note; Dorsey Machine Co. v. McCaffrey, 139 Ind. 545, 38 N.E. 208, 47 Am.St.Rep. 290; Coles v. Kennedy, 81 Iowa 360, 46 N.W. 1088, 25 Am.St.Rep. 503; Virginia Land Co. v. Haupt, 90 Va. 533, 19 S.E. 168, 44 Am.St.Rep. 939; Zang v. Adams, 23 Colo. 408, 48 P. 509, 58 Am.St.Rep. 249; Kentucky Mutual Investment Co. v. Schaefer, 120 Ky. 227, 85 S.W. 1098, 27 Ky. Law Rep. 657; Prewitt v. Trimble, 92 Ky. 176, 17 S.W. 356, 36 Am.St.Rep. 586; Cook on Stockholders,§§ 151-165; Clarke and Marshall on Private Corporations, §§ 1478-1487.

But the question here presented is: Has a stockholder the right to this relief after the corporation has become insolvent, and proceedings have been instituted to wind up its affairs, and when to grant the relief would prejudice the rights of its creditors? Upon this question there is considerable diversity of opinion in the cases that have considered it. In some jurisdictions the right of a shareholder, when a fraud in the sale of stock has been practiced upon him by the corporation, to have a rescission of his contract, is not allowed after the corporation has become insolvent and proceedings have been taken to liquidate its affairs, although the fraud was not discovered before insolvency and there was no laches in failing to discover it. 2 Thompson on Corporations, §§ 1360-1378; Cook on Stockholders, §§ 151, 154; Hinkley v. Oil & Pipe Line Co., 132 Iowa 396, 107 N.W. 629, 119 Am.St.Rep. 564; note to Fears v. Bartlett, 81 Md. 435, 33 L.R.A. 721. But a number of courts of last resort, including our own, hold that if the shareholder has been vigilant in discovering the fraud, and has not been guilty of any laches, he may rescind the contract after the corporation has become insolvent, and proceedings have been instituted to wind up its affairs. Newton National Bank v. Newbegin, 74 F. 135, 20 C.C.A. 339, 33 L.R.A. 727; 10 Cyc. 440.

The only case presenting this question that has heretofore come before this court is Kentucky Mutual Investment Co. v Schaefer, 120 Ky. 227, 85 S.W. 1098, 27 Ky. Law. Rep. 657. In that case the facts were these: Schaefer bought some shares of stock in a West Virginia corporation. Afterwards, and in January, 1900, a Kentucky corporation called...