Tobey v. Kilbourne

• Decision Date: 03 May 1915
• Docket Number: 2531.
• Citation: 222 F. 760
• Parties: TOBEY et al. v. KILBOURNE et al.
• Court: U.S. Court of Appeals — Ninth Circuit

222 F. 760

TOBEY et al. v. KILBOURNE et al.

No. 2531.

United States Court of Appeals, Ninth Circuit.

May 3, 1915

A. C Woodcock, E. R. Bryson, R. S. Smith, John M. Williams, and Louis E. Bean, all of Eugene, Or., for appellants.

C. E S. Wood and Erskine Wood, both of Portland, Or., for appellees.

The appellees were the principal stockholders of the Kilbourne &amp Clark Company, a corporation of Seattle, Wash., engaged in furnishing electrical supplies, machinery, and installing pumping plants for irrigation projects. De Larm and Biehl were the managers and the principal stockholders in the Columbia River Orchards Company, which had an irrigation project at Wahluke, in Washington. To finance the project they had issued $300,000 of bonds, of which a trust company at Seattle was the trustee. In 1910 De Larm, for his corporation, made a contract with Kilbourne & Clark Company, whereby the latter was to build a concrete pumping station and install the necessary machinery thereat, including pipes from the Columbia river to the irrigation ditch. The building of the irrigation ditch was let to another contractor. Before proceeding with the contract the appellees inquired of De Larm concerning the financial resources of his company, and De Larm made a statement showing apparent net assets of about $600,000 over and above debts, including the bond issue above referred to. The appellees made inquiry of others, and obtained verification of De Larm's statement concerning the bonds. They proceeded with the contract, and expended thereon about $47,000, upon which De Larm made payments of about $4,000. In July, 1910, the appellees ceased work, for the reason that De Larm could not pay them as the work progressed, and as provided in the contract.

The appellants owned 4,350 acres of land in Gilliam county, Or., with an equipment of tools, machinery, and stock for operating the same. They entered into negotiations with De Larm with a view to selling said property to his company. De Larm, at his own expense, took E.C. Kilbourne, as a soil expert and irrigation engineer, to inspect the land. This was in February, 1911. De Larm proposed to buy the land and to pay for the same with the bonds of his corporation. W. L. Tobey, one of the appellees, went to Seattle to investigate the bonds, and while there talked with several persons whose names had been suggested to him by De Larm. The information which he received was to the effect that, if the securities behind the bonds had to be sold, the bonds would realize about 80 per cent. of their face value. The appellants had offered the land and its equipment for sale at $120,000. After the investigation made by W. L. Tobey, they demanded more bonds as the purchase price, and the result was that a contract was made whereby they were to receive $140,000 in bonds. On March 4, 1911, deeds to the lands were made out, and were placed in escrow until March 24, 1911. In the meantime, about March 6th, De Larm proposed to Kilbourne that he take the land in payment for the debt of the irrigation company to Kilbourne & Clark Company of $43,000, and in further payment of the expense of the Kilbourne & Clark Company in proceeding and finishing the plant at Wahluke. On March 8th an understanding was reached whereby the appellees were to take the ranch as security for the claim of their company, and for the expenses that they would incur in finishing the plant. Subsequently the agreement was changed, and the appellees agreed as individuals to assume the $43,000 debt which was owing to their company, and as individuals they agreed to complete the pumping plant at Wahluke, the estimated cost of which was about $16,000. They also agreed to install a second pumping unit at the demand of De Larm. In consideration thereof, De Larm agreed to turn over to them the land in controversy, and the equipment of the same, and to pay a debt of $7,500 which Kilbourne & Clark owed the Puget Sound Bridge & Dredging Company and a debt of $2,200 which the appellees' corporation owed the Moran Company. There were other details of the agreement which need not here be referred to. The deed conveying the land to E. C. Kilbourne was delivered to him on March 24, 1911, and he shortly thereafter deeded the land to C. A. Kilbourne. The appellees thereafter carried out their agreement with the irrigation company. In September, 1911, De Larm proposed to the appellees that they place a second mortgage of $17,500 on the land in controversy, and that of the money so obtained $10,000 should be paid De Larm, in consideration for which he would release them from their obligation to install the second unit and from their obligation to complete the intake, the $7,500 remaining of the money realized on the mortgage to be paid to the Puget Sound Bridge & Dredging Company in consideration of their release of the lien which they had placed on the pumping plant. This proposition was assented to. The mortgage was placed of record, but $7,500 of the money realized thereon was never paid to the mortgagor. De Larm received $10,000 of the money, but no money was paid to the dredging company. Early in 1912 the Columbia River Orchards Company's scheme collapsed. De Larm had gone wrong, and he became a fugitive from justice, leaving the irrigation project overwhelmed with additional issues of bonds and forged securities. Thereafter the appellants, finding their bonds worthless, brought the present suit, charging the appellees as co-conspirators with De Larm in a scheme to defraud, and alleging that De Larm had falsely represented to the appellants that the bonds were secured by mortgages to the value of 125 per cent. of the bonds issued, and that the bonds were further secured by land contracts, and that the irrigation company owned some 4,000 acres of land, and had options upon 10,000 acres of railroad lands, all within the project, which allegations were false, and known by De Larm to be false. The appellants alleged that they relied upon these representations and believed them to be true, and were induced thereby to convey their land. They alleged that the appellees had knowledge of the fraud and were parties thereto. The appellees in their answer alleged that, if there was any fraud, they had no knowledge or notice thereof, that they paid a valuable consideration for the land, and that they were therefore innocent purchasers for value without notice, and that they fully complied with their contract with the Orchards Company, without any knowledge, notice, or suspicion of any of the frauds alleged in the bill.

The court below found that there was fraud as alleged in the bill, but found that the appellees were innocent purchasers for value without notice, and dismissed the bill.

Before GILBERT, ROSS, and MORROW, Circuit Judges.

GILBERT Circuit Judge (after stating the facts as above).

The court below, upon the evidence, found that the appellees were not parties to the fraud, and that they knew nothing about it until long after they had paid the full consideration which they agreed to pay for the property; that they did not know the amount of bonds issued by the Orchards Company, or the securities behind the bonds, or the truth or falsity of any representations made by De Larm or others concerning the same, or the details of the transactions between the appellants and De Larm; that in compliance with their agreement when they took the deed to the land the appellees assumed and paid a debt of about $43,000 due the Kilbourne & Clark Company from the Orchards Company, completed the pumping plant at an expense of $16,000 or $17,000, and paid De Larm $10,000, all before they had any notice or knowledge of the alleged fraud; that during the time covered by these transactions, the bonds of the Orchards Company were generally regarded as valid securities, and were being repeatedly exchanged at par for property in Seattle and elsewhere; and that the appellees paid for the property an amount not so disproportionate to its value as to amount to a fraud, and paid the same in good faith and without notice or knowledge that the property had been obtained by De Larm from the appellants through fraud and deceit.

It is the established rule that the findings of the trial court in a suit in equity must be taken as presumptively correct, and that unless an obvious error has intervened in the application of the law, or some serious or important mistake has been made in the consideration of the evidence, the findings will not be disturbed by the appellate court. This rule is especially applicable in a case in which, as here, the testimony was taken in open court, where the trial court had the opportunity to observe the demeanor of the witnesses and their manner of testifying, and the appellate court has before it only a condensed printed statement of the evidence as it is presented under the new equity rule. Thorndyke v. Alaska Perseverance Mining Co., 164 F. 657, 90 C.C.A. 473; Brandt v. United States, 198 F. 449, 117 C.C.A. 208; Harper v. Taylor, 193 F. 944, 113 C.C.A. 572.

It is contended that the decree of the court below involves error of law, in that it disregards the rule that one who purchases...