Waller v. Hodge

• Decision Date: 25 May 1926
• Parties: WALLER v. HODGE ET AL.
• Court: Kentucky Court of Appeals

283 S.W. 1047

214 Ky. 705

WALLER v. HODGE ET AL.

Court of Appeals of Kentucky.

May 25, 1926

Appeal from Circuit Court, Henderson County.

Suit by W. Wright Waller against Thomas Hodge and another. Decree for defendants, and plaintiff appeals. Affirmed.

Henson & Taylor, of Henderson, and T. S. Waller, Jr., of Morganfield, for appellant.

John C Worsham, of Henderson, for appellees.

SAMPSON J.

In 1917 appellant, Waller, then owner of 127 shares of the capital stock of Audubon Mining Company, sold his entire holdings to appellees Thomas Hodge and John Hodge for $8,000, par value $12,700. The company is, and was, engaged in mining and marketing coal. It was organized under the name of People's Coal Company about 1908 or 1909, and produced coal for the local market only, and made its deliveries by wagon. Neither of the parties to this litigation were interested in the company at that time, but about 1916 appellant, Waller, on the advice of his friend, McDonald, an attorney of Henderson, purchased stock and appellees Hodge Bros. also acquired interests. The mine was not on the railroad, and had no shipping facilities. It had never declared a dividend, except in 1912, when through mistake it declared a 4 per cent. dividend, later discovering that the money which paid the dividends of 4 per cent. on its then capitalization $22,000 should have been applied to the payment of its current bills, and money was borrowed by the company to meet those bills.

The officials in charge of the company, except such as devoted their time exclusively to work about the mines, received no salary. After acquiring stock, appellant Waller was made a director of the company, and he was later employed by the company as secretary and treasurer, and placed in charge of its financial operations. He continued in this position for a year more, when because of some disagreement between him and Hughes, the mine foreman, appellant resigned as secretary and treasurer, but continued as a director until August or September of the same year. After leaving the Audubon Company, he took employment with another coal company some 40 miles away, and continued in the coal business part of the summer of 1917. The World War coming on, he enlisted for overseas service, taking training at Ft. Benjamin Harrison consequently was anxious to sell his stock in the coal company. He communicated with his friend McDonald at Henderson, who had advised him to purchase the stock, and McDonald approached appellee John Hodges to know if he would like to buy the Waller stock, and received a reply that he would, if the price was right. Waller asked how much he would give for the 127 shares, and John Hodges answered he would pay $7,500. McDonald submitted this proposition by letter to Waller at Ft. Benjamin Harrison at Indianapolis. Waller proposed to take $8,000 for his stock, and negotiations were in course for about three weeks, when, on October 27 1917, Waller transferred his stock in the Audubon Coal Company to appellees John Hodges and Tom Hodges for $8,000. This suit was instituted by Waller about five years later against Hodge Bros. for a cancellation of the contract and a restoration of the stock; or, if this could not be done, for a recovery of damages on the grounds of alleged fraud and misrepresentation on the part of appellants, who were directors of the company, and thus induced appellant, Waller, to part with his stock in the company, and but for which he would not have sold the stock for the price of $8,000, it being, as he now avers, worth some $30,000 at that time. The Hodges answered, and denied the fraud and misrepresentation charged in the petition, and averred that they purchased the stock of appellant, Waller, at its full value at that time, making no representations as to its value, and concealing no fact from Waller and his agent, McDonald, through whom the deal was made. Two large volumes of evidence were taken and the case submitted. Motions were made by appellant for a transfer of certain issues to the common-law docket for trial, or for an issue out of chancery. This motion was overruled. The court then adjudged Waller had failed to sustain the averments of the petition as amended, and dismissed his cause. Waller then moved for a separate finding of fact and law, which motion was sustained, and the court made the following finding:

"I find the fact to be that the negotiations for the purchase and sale of this stock were conducted through Mr. E. L. McDonald, the personal friend and attorney for the plaintiff; he received no fee or commission for his services from either party, and he claimed none from either. I find he was a friendly intermediary only, and not an agent of either party.

I find the plaintiff had been the general manager of the coal property in question, and actually at its plant every day, directing and controlling its business and operations for a year preceding June, 1917 (the year in which the sale was made). That he was a member of the board of directors of the company until September, 1917, and attended a meeting of the board in that month. That the defendants never had the intimate knowledge of the property nor of its business nor of the possibilities of its property or business that plaintiff had when he sold his stock (though he had been away from it for a few months). That plaintiff had full knowledge of the character and extent of the improvements ordered to be made to the plant during the year 1917, and that, comparing the knowledge of the business and the coal experiences of the plaintiff and the defendants, he had better opportunities to know whether these improvements would increase the prospects of the company to succeed financially. That the only material fact the defendants had knowledge of that the plaintiff did not know when the deal was made is that the company on that date, and for six weeks or two months before, had earned substantial profits, which put it in position to begin to pay its debts, then long past due. That, at the time the deal was made, the conditions of the coal market were good, and that it was certain that, so long as the conditions remained unchanged, the company would earn profits never before experienced by it. That the length of time this condition of the market would continue was entirely speculative, and would depend upon: (1) The amount of wages to be paid miners and other employees; (2) whether sufficient miners would be exempted by the exemption boards, then beginning to operate, to permit mines to produce sufficient coal to operate profitably; (3) whether the Fuel Administration, then proposed and practically certain, would impose reasonable regulations, and fix the prices to be received by mines high enough to enable them to operate at a profit; (4) whether the war would continue for a long or short time; (5) whether business would remain good or collapse, in either event the continuation or the cessation of the war, and, of course, many other contingencies. That with these possibilities in mind, the value of the stock at the time the deal was consummated was uncertain, and the price the defendants paid plaintiff was not grossly inadequate.

I find the fact to be that during the negotiations the plaintiff made no effort to inform himself as to either the value of the property, the condition or operation of the mine, the effect of the new improvements upon its output or profits, or of the condition of the coal market, if he was not informed of any of them.

Taking the plaintiff's evidence as true, and not considering the contradiction thereof by the defendants, I find the only representations of the defendants ever communicated to the plaintiff by Mr. McDonald are, in substance, that the plaintiff need not expect to receive any dividends on his stock; that there would be none, because the company would appropriate to the payments of salaries all the earnings.

I find that it is not proven that the defendants stated either that the company was in an embarrassed financial condition or that the directors had voted to pay the officers increased salaries, or that the stock of the plaintiff was worth not exceeding $8,000.

I find these statements, or representations, shown by plaintiff's evidence to have been made by defendants to Mr. McDonald, and by him communicated to plaintiff, were not statements or representations of facts then or therefore existing. They amount to no more than a threat or a prediction as to the future action of the company, against the illegal performance of which the plaintiff had his ample remedy.

I find the law to be: Gross inadequacy of consideration--such inadequacy as shocks the chancellor's conscience at first blush--coupled with slight fraud is sufficient to justify the cancellation of an executed contract. 9 C.J. 1176; Havlin v. Reed, 5 S. W. 554, 9 Ky. Law Rep. 552; Anderson v. Anderson, 194 Ky. 763, 240 S.W. 1061.

In the absence of gross inadequacy of consideration, where the parties deal at arm's length, and no confidential relations...