Sebastian County Bank v. Gann

• Citation: 180 S.W. 754,121 Ark. 115
• Decision Date: 08 November 1915
• Docket Number: 224
• Parties: SEBASTIAN COUNTY BANK v. GANN
• Court: Supreme Court of Arkansas

180 S.W. 754

121 Ark. 115

SEBASTIAN COUNTY BANK v. GANN

No. 224

Supreme Court of Arkansas

November 8, 1915

Appeal from Sebastian Chancery Court, Greenwood District; William A Falconer, Chancellor, reversed.

STATEMENT BY THE COURT.

Appellants brought these suits, which were afterwards consolidated against appellees, upon two promissory notes, for $ 1,590 each, given in payment for stock of the Sebastian County Bank, of the face value of $ 1,000.

Defendants answered, admitting the execution of the notes and denied liability thereon, alleging that they were procured by false and fraudulent representations of R. O. Herbert, cashier of the bank, that the stock was worth $ 1.59 on the dollar, when as a matter of fact, it was worth very much less; that shortly thereafter the bank became, and it was disclosed by an examination of its affairs about July 1, 1912, that it was insolvent and the stock practically worthless, and prayed that the notes be cancelled. The cases were transferred to equity.

The testimony shows that R. O. Herbert, one of the organizers of the bank, and who had been its cashier from the organization made the statement to the appellees about the time of their purchase of the stock, in March or early in April, 1911, that the stock was worth $ 1.59 on the dollar and they gave their notes for $ 1,590 each, in payment for stock of the face value of $ 1,000. Shortly thereafter a dividend of 10 per cent. was declared and they each received the amount of the dividend and the notes were renewed and later again renewed in 1912, when the payment of another dividend of 10 per cent was made and received.

Gann testified that he had borrowed considerable money from the bank and was approached by Herbert, the cashier about the first of March, 1911, who wanted him to take $ 1,000 of its stock. That a few days later, Fred McCord, brother of J. P McCord, the other appellee, and vice-president of the bank solicited him to take the stock and informed him that it was good and safe to buy and would make him money; that Fred McCord said he wanted him and Jim McCord in the bank as stockholders for the reason that there was talk of putting in another cashier in Herbert's place and if they would take $ 1,000 each, they would have the majority of the stock and could control the bank. That later he was in the bank and Mr. Herbert, the cashier, solicited him to buy the stock and told him it could pay itself out, that the bank would double its stock after the following July and said, "It could lay right there and pay itself out." He told him it was worth $ 1.59 and a money making thing. He admitted that he asked about the value of the stock after the first renewal of the note and learned before the second renewal that it was worth about 90 cents.

J. P. McCord testified that his brother Fred was the first to speak to him about purchasing the stock, and that Mr. Herbert also wanted him to take stock; that his memory was refreshed as to accommodations that had been granted him; he was told that it would be a help if he would take $ 1,000 worth of stock, for which he could give his note to the bank and assured him that the stock would take care of itself. He said further he had heard something about the Greenwood Coal & Lumber Company owing the bank a good deal, but was assured by the cashier, Herbert, that said company and McFarlane owed the bank a minimum; that Herbert said the stock was giltedge stuff, worth $ 1.59, and he finally agreed to take it in February or March, 1911, relying upon what Herbert had said, and gave the bank a note payable on the 1st of July, 1911, and on that day renewed the note payable next July; that he gave a check for $ 159 interest on the note, and was given credit by the bank on his account for $ 100 dividend on the stock.

That this transaction was between the 1st and 8th of June, 1912; this took place just before the bank was closed.

He admitted receiving two 10 per cent. dividends on his stock, one in July, 1911, and the other in June, 1912. He said he felt like he had to help Mr. Herbert to take the stock, and that he was assured by him that it would take care of itself and something was said about doubling or increasing the stock; that he owned $ 1,000 of the bank's stock before he gave a note for this.

Fred McCord testified that he was vice president of the bank, and had a talk with Mr. Herbert, the cashier, about the Greenwood Coal & Lumber Company's indebtedness, but thought it was after the purchase of the stock by the defendant. He knew nothing of the bank's condition, except upon information from Herbert, the cashier, who told him that the Greenwood Coal & Lumber Company's indebtedness had been taken up. Said his brother Jim talked to him about the value of the stock before he bought the last $ 1,000 worth, and he told him he thought it was a good stock, and witness did not know anything else about it.

Herbert testified that he was cashier of the bank from its organization until 1912; that the capital stock was $ 5,000 up to 1900; $ 10,000 up until 1905, and then increased to $ 25,000; it earned 10 per cent. the first year; the second year 37.15. In 1901 20 per cent. on $ 10,000; 1906 to 1911 the earning was 10 per cent. on $ 25,000; the surplus in 1906 over $ 2,000; 1907 nearly $ 3,000; 1908 to 1911, $ 2,000 each year.

He sold Gann & McCord stock at $ 1.59 which had originally been McFarlane's, and was taken in by the bank on his indebtedness. Said it developed in 1912 that the bank had a note on the Greenwood Coal & Lumber Company for $ 5,000, and an overdraft of about the same amount; because of the failure of that company, which was regarded good in 1911, and because of the death of John Rutherford and the insolvency of McFarlane occasioned by two expensive and unsuccessful political campaigns, the bank became insolvent. Said he thought the stock was worth $ 1.59 at the time he sold it to the defendants, and at the time of his testifying still thought it was of that value at that time. That Rutherford, who was responsible on all the paper of the Greenwood Coal & Lumber Company and McFarlane were both solvent then and that Rutherford was regarded as one of the richest men in the State, having large and extensive interests in different portions of it. That the Greenwood Coal & Lumber Company, or Rutherford and McFarlane for it, in April, 1911, deposited $ 15,000 in the bank, which paid up its overdraft and left a credit of three or four thousand dollars. That he had no doubt at the time of the sale of the stock but that it was worth what he stated it to be, and that it did not develop until long afterward, the death of Rutherford intervening, and the insolvency of McFarlane, which rendered the paper of three of the concerns which were indebted to it, of doubtful value and finally caused the insolvency. He had no doubt but that all the paper secured by Rutherford was good until after his death, when it developed his finances were in bad condition.

Miss Alta Blaylock stated that she was assistant cashier of the Sebastian County Bank, between July 1, 1910, and July 1, 1911. The bank value of the stock was $ 1.54; that its net earnings for 1910 were $ 4,738.97, and its net earnings for 1911 were $ 4,584.15. She also submitted a statement of its resources at that time.

The Greenwood Coal & Lumber Company was overdrawn nearly $ 11,000, which was covered by a deposit on April 3, 1911, leaving to its credit $ 3,702.22. In June, 1912, appellee, J. P. McCord, sold to J. H. Holland $ 1,000 of his stock in the bank for which he was paid $ 1,750. J. A. Norris stated that he endorsed the note with R. W. McFarlane and John H. Rutherford by which they procured from the First National Bank, of Fort Smith, on April 1, 1911, $ 15,000, and that McFarlane at the time made him a financial statement, showing his net worth to be $ 25,000; that he considered both McFarlane and Rutherford solvent then. Several other witnesses testified to the same effect.

The chancellor found that the notes were obtained by false and fraudulent representations as to the value of the stock which avoided the transaction, that the Sebastian County Bank took them over after the maturity thereof, and rendered a decree in favor of the defendants, from which the bank appealed.

Decree reversed and cause remanded.

Geo. W. Johnson and Rose, Hemingway, Cantrell, Loughborough & Miles, for appellants.

1. It was error to hold that the representations made by Herbert were false, fraudulent and made with intent to have the defendants to act upon them to their injury. This court has frequently approved the rule that, "Representations, to be fraudulent, must be material to the contract and 'must be made by one who knows them to be false, or else, not knowing, asserts them to be true, and made with the intent to have the other party act upon...