Scott v. Brown

• Decision Date: 10 June 1927
• Docket Number: No. 12719.,12719.
• Citation: 157 N.E. 64,90 Ind.App. 367
• Parties: SCOTT v. BROWN.
• Court: Indiana Appellate Court

90 Ind.App. 367

157 N.E. 64

SCOTT

v.BROWN.

No. 12719.

Appellate Court of Indiana, in Banc.

June 10, 1927.

Appeal from La Porte Circuit Court; E. Miles Norton, Judge.

Action by Reinhardt H. Brown against Emmet Scott. Judgment for plaintiff, and defendant appeals. Affirmed.M. E. Leliter and Hickey, Wolfe & Dilworth, all of La Porte, for appellant.

Darrow, Rowley & Shields, of La Porte, for appellee.

NICHOLS, J.

Action by appellee against appellant for damages resulting from fraud and deceit of appellant through which he was induced to enter into a certain contract. The complaint, briefly stated, avers that appellant and appellee for a number of years were engaged in the business of manufacturing baby carriages and gocarts, and at the inception of said business appellee and appellant entered into a written contract by which each was to be an equal owner in the business, and appellee was to have charge of the manufacture of said baby carriages and gocarts and to invent and design improvements on the same, and appellant was to look after the business, keep the books, and arrange the financial affairs of the company. The company was incorporated, as provided for in the agreement, with a capital stock of $15,000 common and $35,000 preferred. Appellee had been engaged in the manufacture of baby carriages and gocarts in the city of Chicago; with a partner by the name of Walters, each owning a one-half interest, and appellee had machinery, tools, and some equipment for the manufacture of said baby carriages and gocarts. Said business was moved to La Porte, Ind., and appellee was to receive $7,500 for his share and interest in the machinery and tools, and appellant was to and did purchase of appellee's partner, Walters, the interest which he held in the tools and machinery at $7,500, for which he was to receive preferred stock, and appellant was to finance the company and take preferred stock and loan to the company money with which to carry on its business. In the operation of said business for four years, appellant did keep the books and finance the business, and appellee did manufacture and invent and design new models to keep pace with the trade in the manufacture of baby carriages and gocarts.

After having operated said business for four years under the contract which they made, the company had accumulated in assets $359,606.12 and its liabilities were but $91,268, and its business had grown to such proportions that it had outgrown the original capitalization, and that appellant in the management of the affairs of the company concluded to increase the capital stock of the company from $15,000 to $100,000 common, and from $35,000 to $200,000 preferred.

A confidential relation had existed between appellant and appellee during all of said years in the operation of said business, and appellee had implicit confidence in his associate, appellant, in his integrity, honesty, and fair dealing, and was unfamiliar with the financial affairs of the company or its earnings.

Upon the reorganization of the company by which the stock was increased, appellant deliberately undertook and did by false representations, made to appellee as to the financial condition of the company's assets, and other representations, induce appellee to take $7,500 of the common stock of the $100,000 capitalization as his just proportion of the interest in said organization, and caused to have $94,000 of the $100,000 capitalization of common stock for appellant's interest, and induced appellee to take common stock for his preferred stock with accumulated dividends, and that appellee relying upon the false statements made by appellant as to the financial condition of the company, and other representations, entered into a contract between appellant and appellee, by which his interest in the contract that they had been working under was abrogated. Appellee signed said contract, believing the false statements of appellant to be true, and relying upon his integrity and honesty as his associate in business, and did not know the actual financial condition of the company at the time of the signing of said contract, and did not learn of the same until a short time before the beginning of this action.

Appellee alleges that said contract was obtained through fraud and deceit and to deprive appellee of his interest and share of the profits that had been earned by the company prior to the reorganization, for which he asked damages in the sum of $54,500 against appellant. There is some inaccuracy and confusion in computations which we are unable to harmonize, but they are not such as to affect the result or to justify a reversal.

It is further averred that after appellant procured the signing of the contract on September 26, 1919, whereby appellee's just interests were abrogated in the company, appellant so managed the business and put inexperienced men in the management thereof that what stock appellee had, which was held by appellant, became worthless.

Appellant demurred to the complaint, which demurrer was overruled by the court, and appellant then filed a general denial to the complaint. The cause was submitted to a jury for trial, which returned a verdict of $25,000. The court rendered judgment on the verdict and overruled the motion of appellant for new trial. On appeal, appellant assigns as error the court's action in overruling his demurrer to the complaint and in overruling his motion for a new trial.

[1] Appellant contends that the action is for damages resulting from fraud and deceit, and the complaint is to be tested on that theory. Appellee concurs in that contention, and upon that theory the case was tried in the lower court. On that theory it will be tested here. If there are allegations therein sufficient to state a cause of action for fraud and deceit, the fact, if such it be, that there are allegations bearing on some other theory will not make the complaint bad as against demurrer. Denman v. McMahin, 37 Ind. 241;Chicago, etc., R. Co. v. Lawrence, 169 Ind. 324, 79 N. E. 363, 82 N. E. 768. Such allegations might have been stricken out on motion, or, if they confused the issues, appellant might have clarified the complaint by a motion to make more specific.

Appellant states a proposition of law that an action for losses, even though occasioned by fraudulent acts of a corporate officer, can be maintained by a stockholder only on a showing that the corporation fails or refuses to act. But such a rule of law can have no application to the facts as here alleged. This in not an action by a stockholder against an officer of a corporation for the mismanagement of the affairs of the corporation, but it is an action by appellee against appellant as an individual, and not as a corporate officer, for fraud and deceit by which he was induced to enter into a contract to his damage.

The complaint sets out the contract of 1915 and amendment thereto under which the parties were operating, and which contemplated equal ownership of the stock by the parties, alleging compliance therewith by the parties.

It is then alleged that on August 31, 1919, the company of which appellant and appellee were sole owners had accumulated assets amounting to $359,606.12, and that the only liability against the company was $91,268.63, which included $24,000 reserved for federal taxes. That appellee was not advised of the earnings of said company, and had left the matter of financing and distribution of dividends and determining the assets and liabilities to appellant, in whom appellee had implicit confidence for integrity and honesty as to all matters pertaining to the financial condition of the company. That appellee, without knowing the actual condition of the company and earnings thereof, was importuned by appellant on September 26, 1919, to execute the contract which, as afterwards modified, was prepared by appellant, and which is set out in the body of the complaint.

This contract contains a statement that appellant had advanced to the company additional sums of money to a total maximum amount of $254,000, and in addition thereto had guaranteed the credit of company to divers firms. The complaint...