Opinion
No. 30758.
November 6, 1933. Suggestion of Error Overruled February 12, 1934.
1. PLEADING.
Striking of affirmative defense of fraud interposed to action by receiver on stock subscription held proper where no allegation was made that fraudulent representation induced subscriptions and no diligence in discovering fraud and repudiating subscription was shown.
2. NOVATION.
Agreement of stock subscriber with corporation promoter that corporation could retain one hundred twenty-five dollars paid on subscription and that promoter would sell balance of stock to some one else, was not novation of debt on subscription, constituting defense to action by receiver of corporation.
APPEAL from Chancery Court of Jones County.
Welch Cooper, of Laurel, for appellant.
If a person is induced to subscribe for or to purchase stock in a corporation by fraud on the part of its director or managing officers or on the part of any other agent for whose act the corporation is responsible, the effect is to render the contract not void but merely voidable at the election of the subscriber or purchaser. It subsists in full vigor until repudiated by him by some distinct act or expression, or until rescinded by the decree of a court of competent jurisdiction.
14 C.J., sec. 863, p. 588.
There is no presumption of law or fact to be indulged as against the appellant. He offered to show that as soon as he learned of the fraud that had been perpetrated upon him, he took steps to secure a rescission of the contract.
14 C.J. 588.
The act of rescission took place when the appellant notified the president of the company of his discovery of the fraud perpetrated upon him and that he would do nothing to carry out the contract because of this fraud.
14 C.J., p. 592, sec. 866; 14 C.J. 601; Perkins v. Merchants Farmers Bank, 60 So. 131, 103 Miss. 179; Jones v. Barnes, 66 So. 212, 107 Miss. 800.
In the case at bar not only did the appellant surrender everything he had but appellant agreed to leave his cash paid by him in the company and accept nothing for it. He relinquished his right to recover the one hundred twenty-five dollars. We think the case at bar falls squarely within the rule above announced. There is no suggestion that the appellant was guilty of laches.
Savage v. Bartlett, 78 Maryland 561.
The court seems to have gone on the theory that liability in this case was fixed by statute and a rescission of the subscription would not affect debts existing at the time of the rescission or debts made within twelve months thereafter. We urge that this is a misconception of the law.
Burningham v. Burke, 245 P. 977, 46 A.L.R. 466.
The appellant not being guilty of laches and not being estopped on account of other grounds, had the right to rescind the subscription on the ground of fraud subject only to the intervening of superior rights of innocent third persons, but there is no presumption in behalf of such third persons and in the absence of proof that the creditors became such before the contract was rescinded and that they became creditors on account of the subscription.
Independent Vance Co. v. Iowa Merc. Co., 168 N.W. 782; Weissinger Tob. Co. v. Van Buren, 135 Ky. 759, 123 S.W. 289, 135 Am. St. Rep. 502; 7 R.C.L. 241; Boston Fear v. J. Kemp Bartlett, 81 Md. 435, 33 L.R.A. 721; Newton National Bank of Newton, Kansas v. Newbegin, 74 Fed. 135, 33 L.R.A. 727.
A subscriber to stock may, notwithstanding the insolvency of the corporation, rescind his subscription on the ground of fraud, if he has been diligent in discovering the fraud and repudiating the transaction, unless proceedings in insolvency have been instituted or some act of insolvency committed at the time of the rescission.
Hinkley v. Oil Pipe Line Co., 132 Iowa 396, 137 N.W. 629, 119 Am. St. Rep. 564; Zang v. Adams, 23 Col. 408, 58 Am. St. Rep. 249; Virginia Land Co. v. Haupt, 90 Va. 533, 44 Am. St. Rep. 939; Howard v. Turner, 155 Pa. 349, 35 Am. St. Rep. 883; Banks v. Cosmopolitan Trust Co., 41 A.L.R. 658.
Section 4153, Mississippi Code of 1930, has no application here.
The president sold the appellant's stock to another with appellant's approval. Appellant necessarily was released. The principle is elementary and sound.
D.B. Cooley and Shannon Schauber, both of Laurel, for appellee.
It is our contention (first) that a stockholder cannot set up as a defense in a suit brought on behalf of the creditors of a corporation that the stock subscription was secured through fraud. And our (second) contention is also that even though the law is that a stockholder could set up as a defense, in a suit for his unpaid stock subscription, that the same was secured through fraud, yet the appellant in this case has not shown facts that constitute fraud, nor had he shown that his stock subscription was revoked or cancelled prior to the corporation's incurring the indebtedness for which this suit is brought.
14 C.J. 1096, sec. 1716; 7 R.C.L. 406, par. 393; Section 4153 of the Mississippi Code of 1930; King v. Elliott, 5 Smedes M. 428; Hayne v. Beachamp, 5 Smedes M. 515; Lewis v. Robertson, Trustee, 13 Smedes M. 560; Saffold v. Barnes, 39 Miss. 399; Commissioner of Banks v. Cosmopolitan Trust Co. et al., 148 N.E. 609, 41 A.L.R. 658; 41 A.L.R. 674.
We submit that the cases cited and relied on by counsel in their brief on behalf of appellant can all be distinguished from the case now before this court. Counsel for appellant cites sections 863 and 866 of Corpus Juris, volume 14, pages 588 and 601 respectively. This law is not in conflict with the section of Corpus Juris cited by us. The last sentence of said section 866 supports the contention made by us and is in the following words:
"The mere fact of insolvency of the corporation alone will not defeat the subscriber's or purchaser's right of rescission where he has been diligent in discovering the fraud and repudiating the contract, unless proceedings of insolvency, voluntary or involuntary, have been instituted, or some act has been committed which is regarded as an act of insolvency."
Counsel for appellant in their brief contend that the burden of proof was on the appellee to show that the debts were contracted before the date of the alleged cancellation of appellant's stock subscription. We submit that they were mistaken in this contention. The burden of proof was on the appellee, the complainant in the court below, to establish by competent testimony, that appellant was a stockholder in the Continental Electric Manufacturing Co., the insolvent corporation, and also prove the further fact that appellant had not paid the balance owing on his said stock subscription.
Appellant set up as his affirmative defense (1) that the stock subscription was obtained through fraud and (2) that appellant had cancelled the stock subscription before the debts were contracted, for which suit is brought. We submit the burden of proof was on the appellant to prove that he cancelled his stock subscription before the debts were contracted.
Argued orally by Ellis B. Cooper, for appellant, and by D.B. Cooley, for appellee.
Floyd O. Collins, as receiver, filed a bill, for and on behalf of the creditors of the corporation, the Continental Electric Manufacturing Company, in the chancery court seeking to recover from J.L. Collins and numerous others the balance of the unpaid subscriptions of stock in said corporation, alleging its insolvent condition, the amount of balance due by each of the several defendants as the unpaid subscriptions of stock, and attached thereto a copy of the note executed by each of them, and a copy of the written subscription for stock executed by the several subscribers on November 7, 1929. The bill further alleged, in effect, that these unpaid subscriptions for stock were the only assets to which the creditors of the company could look for payment of the debts of the said insolvent corporation.
J.L. Collins appeared and filed his answer, denied that he was a stockholder of said corporation, but admitted that he executed the note and written subscription for stock, and then set up, by way of an affirmative defense, first, that the organization of the company was placed in the hands of one Jolly, who made grossly false and fraudulent representations for the purpose and with the intent to deceive the public; that such representations were made to him, the said Jolly telling the appellant that the proposed corporation had a contract with the Mississippi Power Company by which the appliances manufactured by the proposed corporation were to be sold to said power company, thereby reducing the selling cost of the appliances to be manufactured by said corporation; that this statement was wholly untrue and false; and, second, he then set up that in May, 1930, having discovered that the representations made to him were false, he approached Jolly and demanded a return of his money and a rescission of his contract; that Jolly agreed with him that the corporation would retain his money, and that Jolly, as an individual, would sell the balance of the stock to some one else; and that, afterwards, Jolly reported to him that this had been done. Appellant had paid one hundred twenty-five dollars on his stock.
There was a motion to strike the affirmative matter from the answer filed on behalf of the appellee here, the complainant in the court below, which was sustained by the court.
So far as these allegations are concerned, except a broad, general allegation of fraud, there was no amended answer filed after the court had eliminated these defenses from the answer.
Notwithstanding the state of the pleadings, on the trial of the case, the appellant offered to prove substantially the allegations of the answer which had been stricken therefrom. Objection was made thereto, and was sustained by the court.
We are relieved from a discussion of the serious question as to whether or not one may become a stockholder in a corporation and allow his status to remain unchanged, and then set up on the insolvency of the corporation as a defense to a suit against him, on behalf of creditors of the corporation, for the balance remaining unpaid on his stock subscription, the fraud of the agent who induced him to subscribe therefor.
Whatever the rule may be, it is unnecessary for us to announce a conclusion upon that proposition, for the reason that the action of the court below in striking the affirmative defensive matter from the answer was correct. Nowhere in the allegations of fraud is it alleged that the representations were the controlling cause upon the faith of which the appellant subscribed for this stock. See Clopton v. Cozart, 13 Smedes M. 363, and Black on Rescission and Cancellation, vol. 1, page 47, sec. 24, where the author said: "There must also be an intention to deceive or delude, or an intention that the fraud practiced shall influence the action of the other party, and there must be the fact that it did influence him and induce him to enter into the contract or obligation." See, also, page 300, sec. 110, Id.
It is also quite true that where there is an effort to set up fraud which would entitle a subscriber to stock in a corporation to a rescission or cancellation on account of fraud, that the defrauded person must allege and prove that he exercised due diligence in discovering the fraud, and must promptly repudiate the contract. In other words, he cannot indifferently allow his subscription to remain unpaid until the corporation becomes insolvent, but he must exercise diligence to discover the fraud perpetrated upon him, and he must be diligent in repudiating it. There seems to be no disagreement in the authorities on this point.
Counsel for the appellant frankly conceded that there was no release of Collins from the payment of the balance of his stock subscription. He now seeks to have this court, by some process of reasoning, adopt the agreement with Jolly as a novation of his debt. There is nothing in the statement set forth in the pleadings to indicate a novation of his debt.
Affirmed.