Shuford v. Brown

• Decision Date: 20 May 1931
• Docket Number: 465.
• Citation: 158 S.E. 698,201 N.C. 17
• Parties: SHUFORD v. BROWN.
• Court: North Carolina Supreme Court

158 S.E. 698

201 N.C. 17

SHUFORD v. BROWN.

No. 465.

Supreme Court of North Carolina

May 20, 1931

Appeal from Superior Court, Mecklenburg County; Moore, Judge.

Action by W. J. Shuford, receiver of the Y. & B. Corporation against J. C. Brown. Judgment for plaintiff, and defendant appeals.

Reversed.

Evidence in receiver's action to recover amount paid former stockholder for his stock as depleting corporate assets held not to establish that stockholder sold stock to corporation but that stock was sold to corporation's president individually.

The complaint alleges: That on December 1, 1927, W. J. Shuford was appointed receiver of the insolvent Y. & B. Corporation with full authority ""to collect accounts, settle claims, institute and prosecute suits, and bring such actions at law and in equity as the interest of its creditors and the facts of the case may warrant."

The defendant, J. C. Brown, in the year 1926, was a stockholder in the said corporation and held 60 shares of preferred stock and some common stock standing in his name on the books of the corporation. That the outstanding preferred stock at that time amounted to 40,000 shares at the par value of $10 a share. That at the time it had no real or substantial value. "That the said Y. & B. Corporation in the year 1926, had no property and assets over and above its outstanding indebtedness, or none which was available to either purchase or redeem and cancel its stock or any part thereof, which facts were known to the defendant, J. C. Brown, or he had sufficient knowledge or information to put him upon inquiry as to the financial condition of the corporation notwithstanding which, and desiring and designing to obtain a preference over all other stockholders of the same class and to gain advantage over them in the distribution of the assets of the corporation, and to procure from the corporation money, bonds or other things of value in exchange for his stock, which he knew, or should have known, had no actual or market value, the defendant wrongfully and unlawfully prevailed upon the officers of the corporation, or one or more of them, to take up his aforesaid stock at par by paying to him cash out of the treasury, and thus unlawfully obtained and thus received the sum of $625.00 of assets of the corporation in violation of law and of his relationship and duty to the creditors thereof, and to those other persons stockholders of a like class to him or in a class preferred to the stock held by him. That no steps had been taken by the corporation through its directors and stockholders to decrease its capital stock under the provisions of section 1131 of the Consolidated Statutes of North Carolina, or under section 1161 thereof, or any other provisions of law, but the transaction hereinbefore mentioned was wholly unauthorized and unlawful, and in violation of the express terms of the statutes under which the corporation was chartered. That in the way and manner above described the assets of the corporation were greatly reduced and depleted and it and its creditors were endamaged in the sum of $625.00 and there are now in the hands of the plaintiff, Receiver, insufficient assets to meet the legitimate claims of creditors," etc.

The prayer of plaintiff is to recover from defendant $625 and interest thereon from April 20, 1926. The defendant denies the material allegations of the complaint. As a further answer and defense the defendant denies that he either directly or indirectly sold stock of any kind to the Y. & B. Corporation. That the said stock, in the sum of $625, was "sold to J. A. Yarborough by the defendant, as he had a right to do; that the said sale of said stock was in all respects a personal transaction between this defendant and J. A. Yarborough as individuals; that at the time said sale was consummated the said J. A. Yarborough executed and delivered to this defendant in payment of said stock his personal notes, which this defendant accepted in good faith as the personal obligation of the said J. A. Yarborough. That in the purchase of said stock and the re-sale of the same, as aforesaid, the defendant acted in the utmost good faith, believing that the said Y. & B. Corporation was at all times amply solvent, with a large accumulated surplus, and that the defendant further believed at all times, and now believes that said re-sale was made to J. A. Yarborough as an individual, and not for or on behalf of the said Y. & B. Corporation; that if, in the re-purchase of said stock, the said Yarborough was acting for the said corporation and not for himself, then the said Yarborough was acting in the capacity of agent for an undisclosed principal, and without notice to this defendant then or afterwards, of his said agency, and without notice that he was acting in a representative capacity; that the defendant was at no time advised, or put upon inquiry, that the said corporation was negotiating the re-purchase of said stock through the said Yarborough as agent, and the defendant verily believed, and now believes and so alleges that the said J. A. Yarborough re-purchased said stock for his own individual use and profit, and not with the intent that the same should at any time become the property of said corporation."

For a further answer and defense, the plaintiff alleges that he purchased Y. & B. Corporation stock at the solicitation of the agent of the Y. & B. Corporation, representing to him that the Y. & B. Corporation was solvent, accumulating large profits in its business and it was paying 8 per cent. dividends on the stock. That relying on these representations, which were false, he purchased the stock, paying par for same, and gave his note in payment to the Y. & B. Corporation. "That the said corporation designed and perpetrated a willful and malicious fraud upon the defendant as to the true financial condition of said corporation in the sale of said stock to this defendant; that by reason of said fraud which the plaintiff Receiver alleges was perpetrated, this defendant, in the first instance, was induced to purchase said stock by false and fraudulent representations made with the design, intent and purpose that the defendant might, and did, purchase said stock which was known to the corporation to be worthless. *** That if it had been made known to the defendant at the time he purchased said stock, or at any time prior to the re-sale of the same, that the said corporation was insolvent and was paying out the corpus of the corporate property under the guise of dividends, the defendant could have, and would have, repudiated his purchase of said stock, and could have and would have, recovered the purchase price thereof in an action against the said corporation. That if the defendant's re-sale of said stock to J. A. Yarborough, as aforesaid, was, in law, a sale to the said corporation, which is denied, then by reason of the fraud perpetrated upon the said defendant in the sale of said stock to him in the first instance, said stock having no value as the plaintiff-receiver alleges, the defendant has received in said resale only the sum to which he was entitled, and could have recovered in an action against the said corporation, and this defendant sets up the aforesaid false and fraudulent representations by which he was induced to purchase said stock in the first instance in defense of the plaintiff's right to recover in this action. That if said re-sale of the defendant's said stock to the said J. A. Yarborough, as aforesaid, was, in fact and in law, a sale to the said corporation, which is denied, then the said corporation, its officers and stockholders, ratified said re-sale, knowing the same to have been made, which said re-sale, as the defendant is informed, believes and alleges, is noted on the stock book of said corporation and imports actual notice to the said corporation, its officers and stockholders."

By reason of the facts alleged, the defendant pleads ratification and estoppel in bar of recovery.

For a further answer and defense, set-off and counterclaim, defendant alleges: "That if the plaintiff-receiver is permitted to repudiate the said re-sale of said stock, and to recover judgment against the defendant for the re-sale price thereof, then the defendant is the innocent victim of a willful and malicious fraud by reason of which the said defendant has expended money for worthless stock, suffered loss, and incurred liability thereon, in the sum of such judgment as the plaintiff may recover, which said sum with interest thereon from the date of said re-sale the defendant is entitled, in law and equity to set up in this action as a set-off and counterclaim against any sum that the plaintiff may recover by reason of the matters alleged in his complaint, and which said sum the defendant sets up as a set-off and counterclaim against the plaintiff's alleged claim."

The prayer of defendant was: "Wherefore, the defendant prays:

"(1) That the plaintiff's alleged cause of action be dismissed, that the defendant go without day and recover of the plaintiff his costs.

"(2) That if the plaintiff is permitted to recover judgment against the defendant in any sum by reason of the matters alleged in the complaint, that the said judgment be credited with a like sum as a set-off and counterclaim against the plaintiff by reason of the matters alleged by the defendant.

"(3) For such other and further relief as the defendant is entitled to receive."

In the reply plaintiff denied the material allegations set forth in the further answers, defenses, set-off, and counterclaim of defendant.

The issue submitted to the jury, and their answer thereto, was as follows: "1. Is the defendant indebted to the plaintiff and if so, in what amount? Ans.: Yes, $625.00...