Stotts v. Fairfield

• Decision Date: 27 January 1914
• Citation: 163 Iowa 726,145 N.W. 61
• Parties: STOTTS v. FAIRFIELD ET AL.
• Court: Iowa Supreme Court

163 Iowa 726

145 N.W. 61

STOTTS

v.FAIRFIELD ET AL.

Supreme Court of Iowa.

Jan. 27, 1914.

Appeal from District Court, Hamilton County; Chas. E. Albrook, Judge.

Action to recover on a promissory note given for certain stock in the Stotts Signal Company, an Arizona corporation. Defense--that the note was obtained by fraud. Verdict and judgment for the defendants. Plaintiff appeals. Affirmed.F. L. Anderson and Voris & Haas, all of Marion, for appellant.

D. C. Chase and Wesley Martin, both of Webster City, for appellees.

GAYNOR, J.

Plaintiff brings this action upon a certain promissory note, dated April 25, 1910, executed and delivered by these defendants to one R. P. Dodge for $2,500, and claims that before the maturity of the note, Dodge indorsed and delivered the same to him for value. Defendants admit the execution of the note, but allege as defense thereto that there was fraud in the inception of the note constituting a complete defense thereto; that said note was obtained by false and fraudulent representations made by Dodge to these defendants; that the consideration of said note was 5,000 shares in what purported to be an Arizona corporation, known as the Stotts Signal Company; that at the time the note was made Dodge represented that the stock was worth $1 per share upon the market, while in truth and in fact it was, at the time, absolutely worthless; that Dodge further stated, as an inducement to the plaintiff to take said stock and execute said note, that the said company had patents for manufacturing and installing signals on railroads; that it had a large and valuable plant at Marion, Iowa, free from incumbrances; that the company had plenty of money to run the business; that no indebtedness would be incurred by the company; that said stock was paying a dividend of 10 per cent. per annum; that a dividend would be declared upon said stock within 60 days from the taking of the note, and stated, further, that numerous purchasers of stock in said company had made an expert examination of the signals which were being manufactured, and that such examination had resulted in a determination by said purchasers; that the signals were valuable, and would accomplish the purpose for which they were intended; that the stock was being sold to no one for less than 50 cents a share, while in truth and in fact the same had been sold for 12 cents a share. Plaintiff says that all the statements and representations made by Dodge were false and were known by him to be false, and that the defendants relied upon such statements in taking the stock and executing the note. Defendants further say that Dodge represented to them that the shares of stock, so received by them were worth on the market $1 per share, and he then and there expressly warranted the stock to be worth $1 per share upon the market, and further represented and stated to these defendants that before the note became due he could and would sell sufficient of the stock, purchased by these defendants, to pay the notes, and expressly agreed that he would not transfer the note to any one, but would retain it himself, and that these defendants would never be required to pay any money on said note, except as the money was realized on the stock for which the note was given; that the said Dodge made all said statements, warranties, and representations for the purpose of inducing the defendants to execute the note in suit. Defendants further allege that the plaintiff herein had due notice and knowledge of all the matters herein alleged, and that the note was not taken in good faith by the plaintiff, or for a valuable consideration. To this answer the plaintiff filed what is practically a general denial. Upon the issues thus tendered the cause was tried and submitted to a jury, and verdict returned for the defendants, and, judgment being entered thereon, the plaintiff appeals.

At the conclusion of all the testimony the plaintiffs filed a motion for a directed verdict, which was by the court overruled. Thereupon defendants filed an amendment to their answer pleading a partial defense, alleging that if the stock had any value at all, it did not exceed one cent on the dollar, and thereupon asked that they be allowed the difference between the value of the stock, as warranted by Dodge, and its actual value, as found from the evidence, as an offset against the note. The undisputed evidence upon the trial showed that the Stotts Signal Company was an Arizona corporation; that the plaintiff, Stotts, was a director in said company and general manager; that the company issued 5,000,000 shares of stock at $1 a share; that Stotts received 3,000,000 of the stock issued as a consideration for his patents. The evidence tended to show that Stotts was not the patentee of these devices; that none of these devices had ever been sold, and no contract had ever been entered into with any company for the use of these devices; that the company was organized for the purpose of manufacturing and installing signals on railroads known as automatic railroad signals. It appears that at the time this suit was tried the company was not doing any business, not manufacturing any of the devices; that Dodge was a director in said company. The evidence tended to show that Dodge had sold considerable of this stock at prices ranging from 10 cents to 50 cents per share; that in some instances he took live stock in exchange for shares of stock, land in Dakota without seeing it, shares in mining enterprises, in wireless telegraph. There is evidence tending to show that the patents claimed by Stotts were an infringement on the union switch signal; that this Stotts Company was afterwards reorganized, and new models and patents obtained; that the company has never sold any signals; never installed any, in any railroad, and never had any contract to do so; that it had no money except what it obtained from the sale of stock. Dodge claims that at one time he loaned the company $6,000 realized from the sale of stock belonging to himself; that much of the stock handled by Dodge was reissued in blank to him. Dodge claims that he paid for much of the stock, and for this particular stock, and was the owner of it. He could not, or would not, tell what he paid for it at any time, or how. There is evidence tending to show that Dodge warranted or guaranteed the stock to these defendants to be worth on the market, 50 cents per share. The evidence tended to show that he stated to the defendants substantially the character of the property held by it at Marion, but did not state to them the fact that Stotts was the owner of $3,000,000 of the stock. There is evidence that Dodge represented to the defendants that the Stotts Signal Company was a going concern and prosperous. There is evidence from which the jury might well have found that this stock issued to the defendants was practically of no value; that the patents were of no value; that the only property the company had, as a basis for this stock, was the machinery at Marion, worth about $10,000; four lots on which was a coal shed, a couple of outbuildings; a one two-story building 40x90; an oilhouse; a small office in which was a desk, a table, some chairs and a vault, and about 80 or 90 signals which it still has on hand.

One Lampman, called as a witness, testified as follows: “I have been a member of the board of directors of the Stotts Signal Company and a stockholder for 3 1/2 years. F. S. Stotts has been the manager up until a few months ago, the most of the funds that came into the hands of the company was from the sale of stock, no signals were sold, I am secretary now. May be stock was sold from 10 cents up; I don't know what amount was sold for 10 cents, or what amount was sold for 25 cents, or what was sold for $1; I knew some was sold for 10 cents and some for 25 cents; none was sold for less than 10 cents by the company. Q. Was there any sold for less than 10 cents by anybody connected with the company to your knowledge? A. Yes, sir. Before the year 1910. Q. And since that time? A. Yes, sir. Perhaps a year and a half ago. We thought sometimes it looked pretty good, then in a few months it wasn't so good again. In April 1, 1910, the company had some property at Marion. I don't know that it had the deed at that time; it had some patents. I don't know that the patents belonged to the company, or to Mr. Stotts at that time. Q. What was the value of this stock per share in April, 1910? A. I think 10 cents. Q. Up to April 25, 1910, what was the condition of the company financially with regard to ready money? A. A good share of the time we were out of money. I understood at one time that some railroads would use the two position signal, but no contracts therefor were ever made. We are now working on a new design; a new company has been formed called the ‘Overland Signal Company.’ ”

The defendant, Fairfield, testified that Dodge said that the stock was worth 50 cents per share; that he would guarantee it to be worth that. Said that he relied upon the statement made by Dodge; would not have bought the stock but for it; that he did not then know the value of the stock.

Dodge testified: “I got 19,000 shares in April, 1910. Don't remember what I paid for this. That was part of the stock that had been issued to Mrs. Stotts. It was not treasury stock. It was common stock. Always paid for it before I got it. Sometimes in check, sometimes with a note. I might have sold Mr. Fairfield out of this block of stock. It was issued in blank to save work. At the time this corporation was organized, Mr. Stotts was given 3,000,000 shares for his patents. The par value was $1 per share. The corporation was capitalized at 5,000,000, and in 1906 gave Mr. Stotts 3,000,000 for his patents. I knew at the time I sold this stock to the defendant Fairfield that there had been issued to Mr. Stotts three-fifths of the capital stock of the company.”

W. A. Weaver testified as...