Opinion
13089
March 9, 1931.
Before SHIPP J., Horry, July, 1928. Affirmed.
Action by Bank of Little River against G.T. Todd. Judgment for plaintiff, and defendant appeals.
The report of the referee and decree of Judge Shipp were as follows:
REPORT OF REFEREECounsel consenting, the cases above stated were referred to me by order of this Court to hear and determine all the issues of law and of fact, and I have held references, at which the testimony herewith filed was taken. It appears that there are several other cases of similar nature brought by these plaintiffs against other defendants, and my understanding is that counsel agreed that the decision in the cases above stated would be controlling as to the other cases. However, the testimony upon which my findings are based, of course, relate only to the cases on trial, except that some of the parties in interest testified in these cases.
In the first case above stated, the complaint alleges the incorporation of Farmers' Fisheries Company, the appointment of J.O. Norton, Esq., as receiver on July 5, 1921; that the defendant, N.H. Bellamy, on August 19, 1920, made and delivered to Farmers' Fisheries Company his promissory note in writing in the principal sum of $375, due January 1, 1921, with interest from date at the rate of 8 per cent. per annum and collection charges; that the said note represents the credit portion of the purchase price of certain of the capital stock of Farmers' Fisheries Company; that the note is past due and unpaid; and that creditors of Farmers' Fisheries Company made advances in good faith after the execution and delivery of said note; and that the company is insolvent. The complaint asks for judgment for the amount due on this note and 10 per cent. attorneys' fees. The answer in effect admits the execution, of the note and that it has not been paid but alleges that the defendant was induced to purchase the stock for which the note was given by reason of certain fraudulent misrepresentations.
In the second case above stated the complaint alleges the incorporation of Bank of Little River, the plaintiff; that on June 2, 1921, the defendant G.T. Todd made and delivered to Farmers' Fisheries Company his promissory note in the principal sum of $166.44, due January 1, 1922, with discount before and interest after maturity at the rate of 8 per cent. per annum, payable annually in advance; and the execution of a mortgage upon the tract of land described in the complaint to secure this note. The complaint further alleges the recording of the mortgage on June 29, 1921, in the Clerk's office for Horry County, S.C. in Book 58, page 291; that before maturity and for value the plaintiff became the owner and holder of the note and mortgage; that the condition thereof has been broken; and that there is due and unpaid thereon the sum of $166.44 with interest from January 1, 1922, at the rate aforesaid and $35 attorneys' fees. The defendant Burroughs Bank Trust Company was made a party to the action on the ground that there is of record in its favor an unsatisfied mortgage appearing to cover the lands described in plaintiff's mortgage, but so far as I am informed no answer was made in behalf of his defendant. The prayer of the complaint is for judgment for the amount due and the foreclosure of the mortgage.
The answer in effect admits the execution of the note and mortgage, but alleges that the same were given for stock in Farmers' Fisheries Company, and that the sale was effected through fraudulent misrepresentations on the part of Farmers' Fisheries Company and the plaintiff, Bank of Little River.
It appears from the evidence that prior to February 2, 1920, Allen B. Moore George H. Moore, Moore Thompson, and Dr. J.A. Stone were the owners as copartners under the firm name of Little River Fish Scrap Oil Company of a plant for the manufacture of fish scrap and fish oil located on Little River near the Town of Little River in Horry County. The evidence further shows that on or about February 2, 1920, these parties incorporated Farmers' Fisheries Company, and they were elected directors thereof. The first meeting of the directors was held on February 4, 1920, and at that meeting the corporation agreed to take over the property of the partnership at and for the sum of $26,900, each partner to receive $2,500 in stock fully paid and nonassessable, and the corporation to assume the outstanding debts of the partnership amounting to approximately $16,900. The evidence does not show just how much stock was subscribed to the corporation, nor how was actually paid in. Dr. J.A. Stone, who was elected president at the time of the organization of the corporation, testified that their plan was to pay the partnership debts by forming a new corporation and selling stock. The corporation had a brief existence, and just how long the plant was operated by it is not entirely clear, but apparently the operation covered only the summer months of 1920. The venture was never profitable. The minutes of the stockholders' meeting held January 11, 1921, state that the plant was only operated during the dull months of the year 1920, and that on the operating expenses a small dividend could have been declared had the factory been entirely out of debt. A statement made October 6, 1920 (defendant's Exhibit F) shows that there was on hand at the time $16,730 in notes, presumably notes of subscribers to stock.
I am persuaded that the promoters of the corporation had faith in the venture, although at the time they organized the corporation they started out with a liability of approximately by passing it on to new stockholders except as they themselves purchased additional stock in the company. Dr. Stone testifies affirmatively that he put in $2,500 in new money and that he has since paid debts for the company in a considerable amount. His testimony also indicates that each of the other incorporators put in $2,500 in cash but I am not sure whether he intended to convey this meaning or not especially as the minutes show that the stock of the Moores was purchased by the company and that they would have had $5,000 stock each, because they each received $2,500 in stock for their interests in the partnership. The stock appears to have been sold at least to a considerable extent, to farmers in the vicinity of the plant, it being contemplated that these farmers would use the fish scrap manufactured by the concern, and it was agreed that they should have it at the factory price, or, as the testimony shows, "at about what it costs." The incorporators employed one J.M. Raferty to sell the stock. Raferty did not testify at the reference, and his absence was not accounted for. It is stated in the argument of defendant's counsel that he received 25 per cent. of the amount of all stock that he sold. While there is no evidence to this effect, the ledger of the corporation shows that on November 1, 1920, he was paid as commissions the handsome sum of $5,843.60.
The first question to be considered is: Was there fraud in the sale of the stock to the defendant, N.H. Bellamy? The testimony shows that on March 10, 1920, he purchased one share of the par value of $100; that on May 27, 1920, he purchased four shares amounting to $400, and that on August 19, 1920, he purchased five shares for $500, paying $215 in cash and giving the note sued on for the balance. He testifies that the stock was sold to him by Raferty, who told him on the occasion of the first purchase that they had been operating some and it was a paying proposition, that it paid 15 per cent. to 20 per cent., and that the stockholders would get their fish scrap at cost. He further testified that when he purchased the second lot Raferty stated it had paid dividends of 25 per cent., and that upon the occasion of the third purchase, the one directly in question, he said "it had paid forty per cent. and if I would pay cash for 25 per cent. he assured me I would not have to make any further payment."
It is undisputed that these statements in main were false and related to past or existing facts, and were unquestionably known by Raferty to be false. No dividend was ever earned or paid. It is suggested by way of argument that Bellamy was bound to know when he purchased stock the second and third times that no dividends had been paid, but manifestly the impression that Raferty intended to convey, and which was conveyed, was that the stock had earned the amount stated by him. There were several other witnesses who testified to similar fraudulent statement made by Raferty, and the evidence is plenary on this point. It is clear that the statements made by Raferty, to the defendant, Bellamy, were relied upon by him, and that he was thereby induced to purchase the stock was sold by reason of the fraudulent misrepresentations above stated. Every element of fraud seems to be present, to wit: A false statement made knowingly with intent to deceive, and being relied on did in fact deceive, to the damage of the purchaser.
Whenever a matter of this kind comes before the Court there are two considerations brought to its attention. One is that the courts will not permit fraud to be practiced, and the other is that men who are disappointed in their business transactions may not expect the Courts to relieve them from bad bargains. Consequently, the evidence must always be carefully scrutinized to see whether fraud or bad judgment is at the bottom of the transaction. Testing the evidence by this standard, I think a clear case of fraud has been made out. There does seem to be a sort of fascination in the purchase of stock in a corporation, due to the fact that occasionally stock has proven to be a profitable investment, earning large sums of money without any effort on the part of the stockholders. It is high time that the public generally should learn that such investments are few and far between. Nevertheless the Courts should require fair and open dealing in the sale of stock. The very fact that large commissions are paid to "high pressure" salesmen is unfair to the stockholders because a considerable part of their money is not actually put into the business, but the man who buys the stock has to pay the salesman.
The foregoing statement is not intended in any way to reflect personally upon the incorporators of Farmers' Fisheries Company, not only because of their high character, but because they themselves, or some of them, undoubtedly lost in the venture. At the same time they cannot escape the result of the false and fraudulent misrepresentations of the agent of the company, Raferty. If therefore this suit had been brought by Farmers' Fisheries Company for the collection of the note, it would be manifest that it could not have been collected because of fraud.
This suit, however, was brought by the receiver, and the question therefore arises: Can the defendant sustain his plea of fraud as against the receiver? The law relating to this subject is very clearly stated in the case of Steele, Receiver, v. Singletary, 120 S.C. page 132, 110 S.E., 833, 835, where the Court holds:
"Many cases hold that the receiver stands in the shoes of the corporation, and is bound by whatever would have bound the corporation. Many others have adopted what we consider the more just rule, that if the subscriber has acted with due diligence in discovering the fraud and in repudiating his subscription, and no considerable amount of indebtedness was contracted after the subscription was made, he may set up the fraud in exoneration of his liability."
So the inquiry resolves itself to this: is the defendant Bellamy estopped to rescind the transaction on account of the fraudulent misrepresentations of the agent of the corporation? It is argued with much force that he is estopped, especially by reason of the fact that at the stockholders' meeting held January 11, 1921, he was elected a director of the corporation. The minutes show that two meetings of the directors were held after that time, to wit, January 20, 1921, and on May 2, 1921. At the meeting of January 20, 1921, one stockholder's note for $200 was authorized to be turned over to an attorney for collection. A motion was also made that a committee consisting of the president and one other member of the board call on the stockholders and give them a statement as to the condition of the factory. At the meeting of May 2, 1921, the minutes show that the committee reported that they had seen the stockholders and found many of them dissatisfied, but that after hearing a statement of the condition they seemed to be perfectly satisfied and would do all in their power to pay the notes, such promise, however, not having been fulfilled. Just what statement was made to the stockholders as referred to in these minutes does not appear in the evidence. The testimony of Mr. Bellamy was to the effect that he was unable to ascertain the financial condition of the business. He is a farmer and does not appear to be versed in the complexities of accounting. It also appears from the testimony of the witness A.J. Todd, who was a director prior to the election of Bellamy, that he refused to be reelected because of dissatisfaction with the management of the business, and that he was never able to get a definite statement of the affairs of the corporation. Ordinarily one who is a director of a corporation is presumed to be familiar with its affairs, but I do not think that the Courts should disregard the fact that inexperienced men are often elected directors after the corporation has reached or is approaching insolvency. Under the circumstances of this case I do not think the defendant, Bellamy, is estopped because he became a director of the corporation after it had practically ceased to be a going concern; or that he was otherwise guilty of laches. Plaintiff calls attention to the fact that Mr. Bellamy executed a renewal note to Bank of Little River for the balance due on his second purchase of stock. This is not the not sued on. The bank may have been entitled to the renewal as a holder in due course. Besides, the mere fact of renewal is not conclusive.
The plaintiff also contends that Bellamy should be estopped because a considerable amount of the corporate indebtedness was created after the note in question was given, basing this contention upon the fact that the ledge shows bills payable amounting to about $18,600, some of which were dated posterior to the note. The facts relating to this indebtedness are not shown by the evidence. The minute book shows that on August 11, 1920 (before the note in question was given), the officers were authorized to borrow from the People's National Bank of Conway $5,000 to pay some notes that were due. The statement dated October 6, 1920 (Exhibit F), shows the indebtedness to be $5,000 due this bank and the old partnership indebtedness of $16,000, and that the company had on hand notes for $16,730 to take up this old indebtedness. I do not think the evidence justifies me in finding that the receiver can defeat the plea of fraud. According to the evidence the stock was sold primarily, or at any rate largely, for the purpose of liquidating the indebtedness which the corporation assumed at its organization. It appears to have been born with this incubus and to have died with it. I am therefore of the opinion that the receiver is not entitled to recover, and I so find. I recommend that the complaint in this case be dismissed, and that the defendant. N. H. Bellamy, have judgment against the plaintiff, J.O. Norton, as receiver, for costs.
In the second case, to wit, that of the Bank of Little River v. G.T. Todd, the defendant contends that the stock was sold through fraudulent misrepresentations and that Bank of Little River participated therein. The testimony of G.T. Todd, the defendant in this case, hardly sustains the plea of fraud. He says: "Mr. Raferty said it was in good condition and everything in good shape and it would pay thirty-five per cent. dividend. Said if I would take the stock he would guarantee me that I would never have to pay a cent; that he believed I would get my money back in twelve months." It will be observed that these statements are principally promissory. Assuming, however, that the proof of fraud is sufficient, the question arises: Is Bank of Little River a bona fide holder in due course, having purchased the note before maturity for value? The defendant contends that it is not, because some of the officers of the bank were also officers of the fisheries company and that there was collusion for the purpose of perpetrating the alleged fraud. I do not think, however, that this contention is sustained by the evidence. Officers and directors of a bank by reason of their varied business relations may receive in other capacities notice and information which could not be binding on the bank. If this were not so the rights of depositors and stockholders might be unduly jeopardized. To this extent a bank or other corporation is to be distinguished from its officers and directors. This principle is well established. Farmers' Mechanics' Bank v. Whitehead, 105 S.C. 100, 89 S.E., 657; 8 C.J., 523. Fraud must not be condoned; at the same time, the safety of business demands that negotiable instruments shall be in reality negotiable. The Bank of Little River parted with the funds of its stockholders and depositors in the purchase of this note, and whatever notice any officer or director may have had so far as the evidence shows, was acquired by him not as representing the bank, but as representing some other interest, and, therefore, presumably not communicated to the bank.
I therefore find that plaintiff, Bank of Little River, is entitled to judgment against the defendant, G.T. Todd, for the sum of $242.39, which I find to be due upon the note sued on, together with $35 for plaintiff's attorneys for their services herein, which I find to be a reasonable fee; and I further find that the plaintiff, Bank of Little River, is entitled to a decree for the foreclosure of its mortgage according to law and the practice of this Court.
DEGREE OF JUDGE SHIPPBy agreement of counsel the above-stated cases were heard together by Special Referee L.D. Lide, who found for the defendant in the first of above cases and for the plaintiff in the latter case.
The case of Bank of Little River, a Corporation, Plaintiff, v. G.T. Todd et al., Defendants, was heard by me on Monday, July 9, 1928, on exceptions filed to the referee's report by the defendant G.T. Todd; Messrs. Henry Mullins and L.M. Gasque appearing for the appellant and Sherwood McMillan for the respondent bank.
After a full hearing and reading the testimony taken before the referee, I am fully convinced that the report of Special Referee L.D. Lide is a correct finding of the facts herein and the law applicable thereto. It is therefore ordered that the said report be and the same is hereby confirmed and made the decree of this Court.
Ordered, further, that a decree of foreclosure as prayed for in plaintiff's complaint duly issue.
Mr. L.M. Gasque, for appellant, cites: Defense of innocent purchaser not available: 79 S.C. 384. Other fraudulent acts admissible: 6 Enc. of Evid., 33; 64 S.C. 27.
Messrs. Sherwood McMillan, for respondent, cite: Bank is protected as bona fide holder: 91 S.C. 455. Bank distinguished from its officers: 105 S.C. 100. Report of referee confirmed by Circuit Judge should be affirmed: 16 S.C. 352; 98 S.C. 8; 81 S.E., 1027; 1 S.C. 309; 1 S.C. 421; 5 S.C. 411; 5 S.C. 415.
March 9, 1931. The opinion of the Court was delivered by
The appellant made and delivered to Farmers' Fisheries Company, a corporation, his promissory note in the sum of $166.44, dated June 2, 1921, payable January 1, 1922, and secured the payment of the same by executing and delivering to said Farmers' Fisheries Company his mortgage of real estate. The note and mortgage were assigned to the Bank of Little River, respondent herein, before maturity. When action was brought on the note, and to foreclose the mortgage, the defendant appellant, for answer to the complaint, admitted the execution of the note and mortgage, but alleged that they were given in payment for stock in the Farmers' Fisheries Company which defendant was induced to purchase through fraudulent misrepresentations of Farmers' Fisheries Company, and the plaintiff, Bank of Little River. By consent of counsel, the case was referred to L.D. Lide, Esq., as special referee, who took the testimony, heard argument, and filed his report holding that if there was fraud in the sale of the stock, Bank of Little River did not participate therein, and the bank was a holder in due course of the note and mortgage sued on, and was entitled to judgment thereon. The matter was heard by his Honor Judge Shipp on exceptions to the report of the referee; the exceptions were overruled, and the report confirmed.
The matter is here on appeal from Judge Shipp's order.
The exceptions, two in number, question only the findings of fact by the referee, which are concurred in by the Circuit Judge. Appellant's counsel states in his argument, "There is only one question before the Court, in this appeal, and that is this, `Was the Bank of Little River a purchaser for value without notice?" The answer to this must depend upon the circumstances surrounding the transaction at the time, as gathered from the testimony."
In other words, the answer depends upon the facts. These are clearly and fully stated in the report of the special referee, and need not be restated here. They support his findings of fact and these findings are concurred in by the Circuit Judge. A careful review of the testimony satisfies this Court that these findings are correct.
The exceptions are overruled, and the order appealed from is affirmed.
MR. CHIEF JUSTICE BLEASE and MESSRS. JUSTICES COTHRAN, STABLER and CARTER concur.