Opinion
13998
February 11, 1935.
Before JOHNSON, J., Greenville. February, 1933. Reversed and remanded with instructions.
Suit by Judson Mills, a corporation, against D.L. Norris and another, wherein defendants filed a counterclaim. From a decree for plaintiff, defendants appeal.
The decree of Judge J. Henry Johnson, which was directed to be incorporated in the report, follows:
This controversy arises out of the purchase by the defendants from the plaintiff of 3,000 shares of common stock in Shambow Shuttle Company of the par value of $50.00 each at the credit price of $60.00 per share, for which the defendants gave their five notes, with pledge of the stock, payable in installments of $20,000.00 each on January 1, 1928, 1929, 1930, and 1931, and balance, $100,000.00, on January 1, 1932, all bearing interest at 6 per cent. The installments the principal and interest falling due January 1, 1928, and 1929 were paid. The interest and $10,000.00 of the principal which fell due January 1, 1930, was likewise paid. No other payments have been made on said notes, but the defendants repeatedly promised to make payment until finally in June, 1931, after the notes were placed in the hands of attorneys for suit, the defendants for the first time claimed that they were induced to purchase the stock by fraudulent misrepresentations as to the financial condition of Shambow Shuttle Company, and demanded cancellation of the sale, return of their notes, and the purchase price with interest.
Suit was instituted for the foreclosure of the pledge of the stock and for judgment, and the case, being at issue, was referred to the Master to take the testimony. Voluminous records, consisting principally of auditors' statements, were introduced and certain oral testimony taken, all of which were reported by the Master. The case came on to be heard before me at the term of Court just ended. Nearly three days were consumed in taking the testimony and hearing of argument. I have given to the case very careful consideration and have reached the conclusions hereinafter indicated.
The Shambow Shuttle Company is a corporation chartered under the laws of Rhode Island and is engaged in the business of manufacturing shuttles for cotton mills. At the time of this transaction, its capital stock consisted of —
1,800 shares of preferred stock of the par value of $100.00 per share .......................... $180,000.00 4,000 shares of common stock of the par value of $50.00 per share ........................... 200,000.00 ___________ Total capital stock ........................... $380,000.00 The preferred stock was without voting power so that the entire stock control of the corporation was in the common stock. The ownership of the common stock was in Judson Mills and its treasurer, B.E. Geer, Judson Mills owned 3,000 shares and B.E. Geer 1,000 shares.Norris and Cox had for many years been engaged in the business of manufacturing and selling blocks of dogwood, etc., which were used in the manufacture of shuttles. Cox lived at High Point, N.C., but Norris lived and conducted a part of his business in Greenville. Judson Mills is in the outskirts of Greenville and both Norris and Geer live in Greenville and frequently see each other.
The defendants charge that false and fraudulent representations as to the condition of Shambow Shuttle Company were made by Geer and H.H. Ullman, the president of Shambow Shuttle Company, and they allege that both of these men were agents of Judson Mills in effecting the sale of the stock. They charge that during the negotiations the financial statement of December 31, 1926, prepared by Elliott, Davis Co., a firm of accountants and auditors, with offices in Boston and Greenville, was presented to them and represented to be correct, and they claim that this statement is false in the following particulars: (1) That the value of the blocks, stores, parts, finished goods sold on firm orders, finished goods in stock, and other assets was not correctly stated, but that they were worth $150,000.00 less than shown on said statement; that a large part of the assets were overvalued and should have been charged off, and were subsequently so charged off; and that a large part of the goods stated to have been sold on firm orders had not been so sold; (2) that the valuation of fixed assets at $300,333.00 was incorrect in that these assets on the organization of the corporation in 1921 had been arbitrarily raised by the sum of $145,000.00 above actual value; (3) that the sum of $3,150.00 indicated on the statement as a reserve for dividends had not been earned; (4) that the surplus of $188,466.59 shown on said statement had been created — not by earning, but by the surrender of common and preferred stock to offset losses which amounted to $245,000.00; (5) that the stock shown on the financial statement as having a book value of $97.00 per share was in fact valueless.
The witnesses for the defendants admitted that Mr. Geer is one of the leading business men in Greenville and a man of the highest character, and that Elliott, Davis Co., as accountants and auditors, bear a very high reputation for honesty and ability.
Norris' version of the negotiations leading to the purchase of the stock is as follows: That in October, 1926, Ullman, the President of Shambow Shuttle Company, in Greenville, suggested to him that the stock might be purchased at the price of $50.00 and upwards per share; that following this conversation he had several conferences with Ullman; and that in one of these Ullman gave him a financial statement as of November 30, 1926, and gave him other information with regard to the value of the plant and business. He says that he understood that Ullman was representing Geer or Judson Mills in these negotiations. Norris got in touch with Cox, and these two had a conference with Ullman at Cox's home in High Point. They were interested in the matter and Norris then had an interview with Geer, and some days later had another interview with Geer, and Geer then gave him the option dated January 22, 1927, and extending to January 31, 1927, to purchase the 3,000 shares at the price of $54.00 cash per share or $60.00 on credit, as stated in the option.
Having procured this option, Norris, Cox, and Ullman held a conference which resulted in their entering into a contract dated January 29, 1927, whereby they associated themselves for the purpose of purchasing the common stock and for the control of the business of Shambow Shuttle Company for the period of ten years. This contract recited that it was the purpose of Norris and Cox to purchase 3,000 shares and of Ullman to purchase 1,000 shares, with the understanding that an agreement should be made by Shambow Shuttle Company and Ullman, whereby the latter would serve as president, general manager, and sales manager for the period of ten years ending December 31, 1936, and the business to be under his control, subject to a board of three directors, one selected by Norris and Cox, one by Ullman, and a third to be acceptable to both parties, and stipulating that neither party should sell his interest in the stock without giving the other the opportunity to purchase; any disagreement to be referred to arbitrators, whose decision should be final. Having entered into this contract, Norris saw Geer and told him that he and Cox would accept the option on two conditions, to wit, (1) that he would sell Ullman the remaining 1,000 shares at the same price; (2) on the further condition that Shambow Shuttle Company would enter into the ten-year contract with Ullman, embracing the terms heretofore stated. Geer, after some consideration, accepted these terms, and on February 1st, the contract of sale which has been introduced in evidence between Judson Mills and Norris and Cox was executed. At a later date, probably about February 20, 1927, the purchase was closed, and Norris and Cox executed their five notes dated January 1, 1927, for the purchase price, $180,000.00, payable at the times and on the terms as shown by the complaint, and this was followed by the sale of the 1,000 shares to Ullman on credit.
Norris and Cox, being engaged in the business of selling blocks to shuttle companies, and apprehending that if their connection with Shambow Shuttle Company were known, it might interfere with their business, asked Mr. Geer to represent them on the board of directors. So that Geer, Ullman, and M.J. Offers, the Treasurer of Shambow Shuttle Company, were elected directors, and, in pursuance of the contract with Norris and Cox, Ullman was elected president, general manager, and sales manager.
After the purchase, Norris and Cox gave Ullman an option on their 3,000 shares extending over a period of years, at a price beginning at $75.00 per share, and with yearly increases at the rate of $18.00 per share.
During the month of January, probably before the notes were executed, Norris visited the plant at Woonsocket, discussed the business of the company with Ullman, and went over the entire plant. On his return to Greenville, he made no complaint either as to the plant, its assets, or the business of the company. Nor were any complaints made until June, 1931. Monthly statements as to the operations of the business and detailed annual statements were prepared by the auditors and submitted to Norris and Cox. Norris made frequent visits to the plant and he and Cox kept in close touch with the business of the company through contact with Geer and the president of the corporation.
It appears that Ullman's management was not satisfactory to Geer, Cox, and Norris, and in June, 1928, he, at their request, resigned and severed his connection with the company, and Ralph T. Greene was elected in his place, who continued to be president and manager until the summer of 1930 when he resigned and Pursley B. Phillips was elected in his stead.
The several alleged misrepresentations will now be considered.
(1) As to the claim that the value of the blocks, stores, parts, finished goods sold on firm orders, finished goods in stock, and other assets was not correctely stated, but that they were worth $150,000.00 less than shown on said statement; that a large part of the assets were overvalued and should have been charged off, and were subsequently so charged off; and that a large part of the goods stated to have been sold on firm orders had not been so sold.
That part of the financial statement which is challenged in this connection is as follows:
ASSETSCurrent: Office Cash Funds ............. $ 1,100.00 Cash in Banks ................. 78,704.80 Accounts Receivable — Customers .................. $ 59,906.64 Less: Reserve for Doubtful Accounts ................... 4,041.35 ___________ Total Accounts Receivable Protected by Credit Insurance ........ 55,865.29 Notes Receivable for Other than Merchandise — Secured .................... 15,398.71 Inventories: Blocks ..................... $122,481.55 Stores ..................... 23,934.68 Finished Parts ............. 97,277.57 Work in Process ............ 13,921.57 Finished Goods Unsold ...... 48,200.84 __________ Total Inventories ............. $305,816.21 Finished Goods — Sold on Firm Contracts for delivery within one year or less ........... 64,464.46 Stock and Bonds of Other Companies (at cost) .................. 1,000.00 ___________ Total Current Assets .......... $522,349.47 It is claimed that "a large part of the goods stated to have been sold on firm orders had not been so sold." This relates to the item of $64,464.46 in the financial statement prepared by Elliott, Davis Co., which was introduced in evidence by the plaintiff. It was stated in this report that these contracts had been carefully checked and found to be correct. Mr. Murphy, who has for many years been in charge of the sales department of Shambow Shuttle Company, testified that the handling of these contracts was a matter in his charge; that he got up the data for this item from the contracts themselves; and that practically all the orders were in fact filled. There was no testimony to contradict this evidence, and I, therefore, find that this claim made by the defendants is unsustained.
The claim that the value of the blocks, stores, parts, and finished goods in stock, and other assets was not correctly stated, but that they were worth $150,000.00 less than shown on the statement, is not sustained by the evidence.
This claim seems to have been predicated largely upon the fact that in the financial statement of December 31, 1930, a reduction of $68,709.25 in the value of these inventories was made.
Mr. Phillips, the president of the company, testified that the reductions in value shown in the inventory of December 31, 1930, were recommended by Mr. Murphy, the sales manager, and passed upon by him, Phillips; that these changes were based upon the reduced salability of the products; that conditions in the textile industry were bad that year, many of the cotton mills were curtailing and many plain looms, for which shuttles had been manufactured, had gone out of business, thereby rendering these shuttles obsolete.
Murphy testified that the inventory of December, 1930, was made under him; that the figures had to be revised downward on account of reduced market prices; that many cotton mills, for which they had manufactured shuttles, had closed down; and that on this account a considerable part of the stock of shuttles and parts had become obsolete or unsalable, and that all these facts were taken into consideration in making the reduction in the inventory, and that the inventory, in his opinion, reflected the actual value.
Mr. M.J. Offers, who has for many years been treasurer of the company, testified that this reduction represented an adjustment in the inventories due to abnormal conditions in the textile business and the general falling market upon all cotton mill supplies at that time; that this was done with the knowledge and consent of Mr. Phillips and Mr. Geer.
The defendants themselves admitted that because of the unfavorable market conditions, particularly affecting the textile industry, there was practically no sale for shuttles at this period, but they claimed that the decline in the market was not sufficient to justify this reduction. In several letters of both Norris and Cox, written during this period, were statements indicating that there was practically no sale for shuttles.
The Court takes judicial cognizance of the fact that the years 1929 and 1930, as well as the years which followed, have been disastrous to the cotton mills business, and this necessarily affected all lines of auxiliary and dependent business. Practically the only testimony which tended to support this claim was that of Mr. Greene. He testified that these reductions were almost wholly due to obsolescence and depreciated values which existed in 1926; that it was Ullman's practice to carry on his inventories items which had become obsolete and of no value; and that there was a very large accumulation of blocks and parts of this character in 1926. But on cross-examination he stated that he did not remember whether Ullman had charged off any of the obsolete items, but that he had a lot of these items, which should have been charged off, and he also admitted that after he became president he had made no change in the inventories. In other words, although he now claims that a large number of items should have been charged off as worthless, he admits that in the inventories made during his administration no such reduction had been made. This admission, with the manner of Greene's exit from the company, tend to discredit his statement. In reply to Greene, the inventory of 1926 was produced and it developed that the inventory did carry a very large number of shuttles, which, in the inventory itself, were stated to be of no value, and there were many other shuttles which were put down at a very small value. Two pages of the inventory were copied into the record, from which it appeared that on these two pages 43 shuttles were carried at 76 cents, 154 shuttles at 74 cents, 39 shuttles at 70 cents, 14 shuttles at 62 cents, 60 shuttles at 61 cents, 45 shuttles at 50 cents, 1,941 shuttles at 45 cents, 1,941 shuttles at 31 cents, 1,848 shuttles at 25 cents, 4,175 shuttles at 5 cents, 48 shuttles at 4 cents, 5,084 shuttles at no value at all. Murphy testified that in this inventory which was made by him and under his direction, full allowance was made for obsolete articles and slow moving shuttles, and that the inventory, according to his judgment, represented the actual cost or actual market value, whichever was lower.
In the auditor's report, which was introduced in evidence by the defendants, we find the following statement: "Physical inventories of all items were taken at December 31, 1926, and were priced at cost or market, whichever was lower. We made no attempt to verify the above amounts by taking a physical inventory ourselves, but made tests of the inventory during the year and tested the accuracy of the inventory sheets as at December 31, 1926."
Although Norris and Cox were in close contact with the business, receiving monthly reports and annual detailed statements and were virtually in control of the business from February, 1927, they in no way questioned the accuracy of the inventory until they were faced with a lawsuit. Had there been any ground for this complaint, we may well assume that Ullman, who was associated with them in the purchase of the common stock and securing control of the company, would have communicated the fact, and that it would have been urged as a ground for some reduction in the purchase price. The long lapse of time, the full opportunity of Norris and Cox to acquaint themselves with conditions, their virtual control of the corporation without complaint, are facts which weigh strongly against any such claim, while the records and the testimony of Offers and Phillips are clear and satisfactory. In the opinion of the Court, the depression in the textile business which existed in 1930 called for a drastic reduction in inventory values. What reduction was proper was largely a matter of judgment. Certainly the fact that a considerable reduction in these inventory values was made as of December 31, 1930, would not in any way reflect upon the honesty or accuracy of the financial statement of December 31, 1926. For these reasons. I cannot sustain this claim.
(2) As to the claim that the valuation of fixed assets at $300,333.00 was incorrect, in that these assets on the organization of the corporation had been arbitrarily raised by the sum of $145,000.00 above actual value.
This claim seems to have been based upon the fact that prior to 1921 the business of Shambow Shuttle Company had been operated as a partnership which was owned by the Shambow family. In 1921 the business was incorporated, and the property, consisting of lands, buildings, machinery, supplies, stocks on hand, and other assets, were transferred to the corporation. At this time, as appears from the auditors' statement, an appraisal was made by independent appraisers of the value of the buildings and machinery which had been erected in preceding years, and the property was taken over by the corporation at the appraised value. Mr. Geer testified that he was familiar with the plant of Shambow Shuttle Company, that it was up-to-date and as good or better than any in that line of business. During the very month, February, 1927, when Norris and Cox purchased the stock, Norris visited the plant, and he, with Ullman, discussed the business and went over and inspected the entire plant and the operations thereof. According to Norris testimony, their discussion even went into a comparison of costs at that plant and at the plant in Norris' charge. Norris furthermore admits that he visited the plant on each trip he made to the east, and Cox admitted having visited the plant at least two or three times. Ullman, their associate in the purchase and ownership of this stock, was in actual charge of the plant. Had there been any overvaluation, it is inconceivable that the matter would not have been brought to Geer's attention prior to June, 1931. The fact that the plant of the partnership was taken over by the corporation in 1921 at the appraised value, which was higher than the value at which it was carried on the books of the old partnership, would not tend to depreciate the integrity of the valuation at which the plant was carried upon the books of the company on December 31, 1926.
Referring to Exhibit A of the financial statement of December 31, 1926, we will find the following as a statement of the plant value:
Land .............................. $ 10,737.37 Buildings ......................... $150,371.49 Machinery and Tools ............... 193,069.79 Office Equipment .................. 19,740.38 Automobiles ....................... 11,974.94 Sundry Equipment at Greenville .... 1,461.64 Semi-durable Tools ................ 8,658.00 __________ Total Depreciable Property ..... $385,276.24 Less: Reserve for Depreciation . 106,199.38 ___________ Depreciated Value of Operating Properties .................. 279,076.86 ___________ $289,814.23 From this it appears that the plant was carried on the statement of December 31, 1926, after deduction of depreciation, at the figure of $289,814.23. These figures were in the possession of both Norris and Cox when from time to time they visited the plant, and, as stated, they were unchallenged until immediately prior to the institution of suit. I find that their claim as to excessive valuations is unjustifiable.(3) As to the claim that the sum of $3,150.00 shown on the statement as a reserve for dividends had not been earned.
There is no justification for this claim in view of the fact that the net profits from the operation of the company for the year 1926, before setting aside depreciation, amounted to $81,873.91, and, after deducting depreciation, $24,896.24, and dividends on the preferred stock of $12,833.33, left a net profit of $44,144.34, or a net profit allocable to the common stock of 22.1 per cent.
This was merely a reserve set upon the books of the company, which was intended to meet the semiannual dividend which would accrue in a few months thereafter on the preferred stock.
(4) As to the claim that the surplus of $188,466.59 shown on the statement had been created — not by earnings, but the surrender of common and preferred stock to offset loss which amounted to $245,000.00.
This claim was not made until the answer was amended. It has reference to the fact that during the period from 1922-24 the Shambow Shuttle Company purchased lands and established a manufacturing plant at Greenville for the purpose of manufacturing spools and bobbins. This venture, as explained by Mr. Geer, was entirely distinct from its business at Woonsocket where they manufactured shuttles. The Greenville venture was most unfortunate and the plant was sold, realizing a loss of $245,000.00. This necessitated a change in the capital structure, which was effected by the surrender of the old no par value common stock and the conversion of the old preferred stock into new common stock, consisting of $200,000.00, divided into shares of the par value of $50.00 each, and of 2,000 shares of new preferred stock of the par value of $100.00 each. This new preferred stock was sold for $150,000.00 in cash, which was put into the business. On December 31, 1923, the company had a surplus of $105,716.96. The result of the Greenville venture was to wipe out this surplus and leave an impairment of capital. After the change in the capital structure and after adding $150,000.00 in new money, the result was that the assets, including the new money, exceeded liabilities by approximately $80,000.00, and this was carried on the books as a surplus. To this was added the net profits for the year 1925, which, after deducting depreciation ($22,197.60), amounted to $64,974.92, and the net profits for the year 1926, which, after deducting depreciation ($24,896.24), amounted to $44,144.34. These items then together made the surplus shown on the statement of December 31, 1926, to wit, $188,466.59.
The fact that this surplus was made up partly of the new capital and of the earnings of 1925 and 1926 constitutes no element of misrepresentation.
The defendants argue that the word "surplus" in financial statements indicates that it is made up wholly out of accumulated profits, and that, therefore, the audit in showing a surplus of $188,466.59 was misleading and false.
This argument does not appeal to me. The word "surplus," as employed in corporate finances, signifies the net assets in excess of all liabilities, including its capital stock. This surplus may be paid-in or earned surplus, or a combination of the two. Edwards v. Douglas, 269 U.S. 204, 46 S.Ct., 85, 88, 70 L.Ed., 235; Willcuts v. Milton Dairy Co., 275 U.S. 215, 48 S.Ct., 71, 72 L.Ed., 247; Leather Manufactures' National Bank v. Treat (C.C.A.), 128 F., 262.
In the first case cited the Supreme Court said: "The surplus account represents the net assets of a corporation in excess of all liabilities including its capital stock. This surplus may be `paid-in surplus,' as where the stock is issued at a price above par; it may be `earned surplus,' as where it is derived wholly from undistributed profits; or it may, among other things, represent the increase in valuation of land or other assets made upon a revaluation of the company's fixed property."
(5) As to the claim that the stock shown on the financial statement as having a book value of $97.00 per share was in fact valueless.
The book value of the common stock as of December 31, 1926, was $97.61 per share. The sale to Norris and Cox was on the basis of $60.00 per share on credit. So that it is evident that the price of the stock was not predicated upon the assumption that the book value and the actual value of the corporate property were identical. That the stock was reasonably worth, at the time of the sale, $60.00 per share, will admit of little question if we have regard to the assets of the corporation and the prospects of the business as of January, 1927, and not in the light reflected by the subsequent catastrophic years.
The auditors' reports, which have been introduced in evidence, show that this business was started by the Shambow family in the year 1914, with a capital of $35,000.00; that the business was unusually successful, so that when it was incorporated in 1920 its assets amounted to more than $300,000.00. In the panic of 1920-23 the business lost money. From 1923 to 1924 the shuttle plant at Woonsocket made profits. During this period the Greenville plant, for the manufacture of spools and bobbins, was established, and, after attempting to operate, this branch of the business was abandoned, realizing a loss of $245,000.00. Then the reorganization, which has already been treated, took place. The years of 1925 and 1926 were quite profitable.
Referring to the statement of December 31, 1925, we find that the net profits, after deducting $22,197.60 for depreciation, amounted to 64,974.92, and after deducting dividends on the preferred stock was 25.4 per cent. per share common stock. Referring to the financial statement of December 31, 1926, we find that the net profits, before depreciation, amounted to $81,873.91. After deducting depreciation of $24,896.24 and dividends on the preferred stock of $12,833.33, there was a profit of $44,144.34 left, or 22.1 per cent. on the outstanding common stock.
In 1927, as shown by the auditors' statement for that year, the net profits, before depreciation, amounted to $60,282.64; after setting aside depreciation of $22,637.55 and the dividends paid on the preferred stock, there was left 11.3 per cent. net profits allocable to the common stock.
The claim that the common stock in January, 1927, was worthless, cannot be sustained. It had a book value of $97.61 per share. The profits of the business for the year 1925, after deducting depreciation and preferred dividends. represented 25.4 per cent. allocable to the common stock, and the profits for the year 1926, after deducting depreciation and preferred stock dividends, were 22.1 per cent. allocable to the common stock. The plant, as testified by Mr. Geer, which testimony is uncontradicted by the defendants, was in splendid physical condition. The business at this time was prosperous and every indication pointed to continued prosperity. Certainly the dealings and contracts between Norris, Cox, and Ullman indicated that they, with all the facts in hand, thought the business would continue to prosper. That the years 1930, 1931, and 1932, on account of general business conditions peculiarly applicable to the textile business, proved to be disastrous, is not to be charged against the plaintiff. The transaction is to be viewed in the light of the facts and business conditions existing in January, 1927, and not in the light of the conditions which existed at the time of the institution of this suit.
Before concluding this branch of the decree, I wish to say that while the defendants in their answer charged Mr. Geer with fraud and misrepresentation, yet, when it came to their testimony, they admitted that he was a man of very high character, and that in his negotiations for the sale of the stock he was candid and open, and that subsequently, while acting as their chosen director or representative, he dealt honestly and fairly with them, giving them all information in his possession with regard to the business.
After full consideration, it is my opinion that the sale of the stock was free from any fraud or misrepresentation.
But even if there had been misrepresentation as to the financial condition of the corporation, under the applicable principles of law the defendants would be precluded from any recovery based on such claim. The principles touching the right of a purchaser of chattels or choses in action to recover upon the ground of defect or misrepresentation are clearly established in this State.
If the purchaser knows of the defect before acceptance, or if the defect is obvious and ascertainable by reasonable inspection, then acceptance would amount to waiver of the defect or breach of representation.
If before acceptance the purchaser did not know of the defect and did not have opportunity to inspect, then after the purchase he would have a reasonable time to make inspection or inquiry and present claim based upon the defect or breach of representation. But if the purchaser does not within a reasonable time after acceptance avail himself of the opportunity to make inspection or inquiry, but continues to hold on to the goods or choses in action, without inspection and without complaint, he waives the right to make claim based upon such defect or breach of representation. Smith Bros. Grain Co. v. Adluh Milling Co., 128 S.C. 434, 122 S.E., 868; Southern Coal Co. v. Rice, 122 S.C. 484, 115 S.E., 815; Empire Buggy Co. v. Moss, 154 S.C. 424, 151 S.E., 788; L.D. Powell Co. v. Levy, 136 S.C. 387, 134 S.E., 415; Griggs-Paxton Shoe Co. v. Friedheim Bro., 133 S.C. 458, 131 S.E., 620.
In the case last cited the defendant purchased a bill of shoes to be shipped in September, 1920. The goods, which were shipped in cases bound by wire, arrived the latter part of September. They were retained by the merchant without examination until October 20th, when he claimed that they did not come up to representation and shipped them back. The Court held that by the failure to make examination within a reasonable time he waived the right to return the goods or to claim damages for defect.
In the case at bar the purchasers of the stock made no complaint until after the lapse of more than four years, during which time they were virtually in control of the corporate business.
It is, therefore, ordered, adjudged, and decreed that the plaintiff is entitled to the relief demanded in the complaint, and that it have leave to enter judgment against the defendants for the sum of $130,000.00, with interest from January 1, 1930, at the rate of 6 per cent, per annum and for the costs; that the plaintiff is entitled to foreclosure of the pledge of the stock in Shambow Shuttle Company, and that the Master of this county, after advertisement according to law, do offer said stock for sale at the usual time and place, on salesday in February, 1933, or some subsequent salesday, for cash; that the stock be offered first in the following lots: (1) One lot of 333 shares, (2) one lot of 333 shares, (3) one lot of 334 shares, (4) one lot of 1,667 shares; and that thereupon he do offer for sale the entire number of shares, to wit, 2,667, and that he accept whichever set of bids realizes the higher price. That in case the purchaser should fail to immediately comply that the Master be authorized to resell the stock immediately, or on some subsequent salesday, at the risk of the former purchaser, and that he continue so to do until there shall be compliance. That on such sale any party to this action may become the purchaser. Out of the proceeds of sale, the Master, after paying the costs and expenses of this action, is directed to pay the remainder to the plaintiff, and to be credited by the Master upon the judgment in this case.
Messrs. Blythe Bonham, for appellants, cite: As to express warranty: 87 S.C. 87; 93 S.C. 185; 135 S.C. 321; 120 S.C. 132; 120 S.E., 158; 120 S.C. 88; 134 S.W., 453; 165 S.C. 509; 110 U.S. 7; 3 S.Ct., 428; 28 L.Ed., 49. Breach of warranty: 128 S.C. 434; 122 S.C. 484; 154 S.C. 424; 136 S.C. 387; 133 S.C. 458. Laches: 180 Fed., 10; 30 L.R.A. (N.S.), 1011; 41 F.2d 914; 92 U.S. 101; 23 L.Ed., 471.
Messrs. Haynsworth Haynsworth, for respondent, cite: Partnership: 14 S.C. 621; 90 S.C. 90; 129 S.C. 127; 20 R.C.L., 157; 15 F.2d 920 (C.C.A.); 45 F.2d 465 (C.C.A.). "Surplus" defined: 269 U.S. 204; 46 S.Ct., 85; 275 U.S. 215; 48 S.Ct., 71; 318 Fed., 905; 128 Fed., 262.
February 11, 1935. The opinion of the Court was delivered by
There is some conflict in the facts of this case, but in the main the facts are not seriously divergent and this opinion is based largely upon admitted facts. The difficulty arises as to the proper construction of those facts, the inferences to be drawn therefrom and the application of well-established principles of law to such facts and necessary inferences.
In the beginning, let it be fully understood that the controversy has arisen between Mr. B.E. Geer and Mr. D.L. Norris, both highly respected citizens of Greenville, and that no insinuation is intended to be cast upon the character of Mr. Geer in offering the stock for sale or upon the mental qualifications of Mr. Norris in accepting the offer. We prefer to say that it was a transaction intended to be governed by good faith, on the one part, and by business intelligence and confidence on the other. We will, therefore, make a very brief statement of the basis of the suit, refer to certain well-established principles of law, and then enlarge upon the facts as they appear from the transcript.
This Court has held, in 166 S.C. 422, 164 S.E., 919, that this suit is in equity and, therefore, the facts and the law are before us for determination, it being unnecessary to say that the decision at which we arrive will be final.
Shambow Shuttle Company, as its name would imply, a maker of shuttles for textile mills, was a corporation with plants at Greenville, S.C. and at Woonsocket, R.I. It had been in business for many years, first as a partnership and later as a corporation. Judson Mills of Greenville, S.C. of which Mr. Geer was president, was the owner of 3,000 shares and Mr. Geer owned, personally, 1,000 shares of Shambow Shuttle Company. Norris and Cox became interested in the purchase of the stock through one H.H. Ullman, then president of the company, Ullman then being in Greenville attending to certain business of the corporation. They were shown a financial statement of the affairs of the corporation, which showed that the capital stock of the company at a par value of $50.00 per share had a book value of $97.00 plus per share. Ullman said that the stock could be bought for par or a little above par. Norris and Cox were deeply interested and later followed up the subject of purchase with Mr. Geer. Ullman seems to now disappear entirely from the transaction. A later statement of the financial condition of the company, the one of December 31, 1926, was shown to Norris and Cox by Mr. Geer. This statement was not materially different from the statement shown by Ullman, the surplus and book values being approximately the same. Later Norris and Cox agreed to purchase the 3,000 shares of Judson Mills stock at $60.00 per share and gave their notes for same, as follows: Four notes for $20,000.00 each, payable in one, two, three, and four years, and one note for $100,000.00, payable in five years, all notes bearing 6 per cent. interest. Certain payments were made upon the notes as will hereinafter appear. In 1931 no payments were made on the notes and this suit was brought to recover the balance due thereon, with interest.
The defendants answered the complaint, alleging that they had been misled into purchasing the stock by the falsity of the statement of the financial condition of the company; that a fraud had been practiced upon them; that they relied upon the statements as being true; and that they would never have purchased the stock had they known the true financial condition of the company. They asked for a rescission of the contract of purchase and also counterclaimed for the amounts they had already paid.
The cause was referred to the Master for Greenville County to take the testimony and report same to the Circuit Court, no recommendations by the Master being ordered. Upon the testimony submitted by the Master, the Circuit Judge rendered his decree in favor of the plaintiff, and from the judgment entered thereon, this appeal has been taken.
The law in regard to transactions of this nature has been definitely settled in this state by several decided cases, the leading ones not being mentioned in the circuit decree. Before going further into the facts of the case, we will set forth extracts from certain decisions which we think applicable to this appeal.
Iler v. Jennings, 87 S.C. 68 S.E., 1041, 1044. In this case Iler bought certain stock from Jennings in Gambrell Hardware Company, Greenwood. S.C. of which company Jennings was a director. Jennings had no personal knowledge of the value of the stock and before the sale was made he suggested to Iler that Iler go the bookkeeper and get a statement of the financial condition of the company. This statement showed the stock to have a book value of $119.00 and upon this statement Iler bought the stock. Several months later the president of the company died and upon taking a new inventory it appeared that the president had, either through mistake or design, overvalued the inventory by $6,000.00. This reduction in the assets of the company reduced the book value of the stock to about $65.00 per share. Iler brought suit to recover what he had paid for the stock on the ground of breach of an express warranty contained in the statement as to the value of the stock. The Circuit Judge held that since Jennings, the seller, had no knowledge that the stock was not of the value represented by the statement furnished by the bookkeeper that there was no express warranty. In reversing the lower Court, this Court said: "Such use of a statement of the corporate business by a director negotiating a sale of his stock therein could not be regarded as other than a direct affirmation of its correctness, and, if was delivered for the purpose of assuring the buyer of the truth of the facts therein stated and to induce him to purchase and the buyer purchases in reliance thereon, there is an express warranty."
Upon a second trial of the case, upon the same facts, the Circuit Judge directed a verdict for the plaintiff.
In affirming that judgment, the Court in Id., 93 S.C. 185, 188, 76 S.E., 276, said: "Upon the new trial, his Honor, Judge Gage, held that the evidence was susceptible of only one reasonable inference, to wit, that the statement was delivered for the purpose of assuring the plaintiff of the truth of the facts therein contained, and to induce him to purchase defendant's stock, and that plaintiff did buy the stock in reliance thereon. He therefore directed a verdict for plaintiff. The sole question is whether the evidence made any issue which should have been submitted to the jury. We agree with the Circuit judge that it did not. * * *"
In the case of Kimbrell et al. v. Taylor et al., 135 S.C. 321, 133 S.E., 829, 830, Mrs. Taylor sold her stock in Kimbrell Furniture Company under a contract containing this provision: "The foregoing sale is based on the statement heretofore given by the sellers to buyers, approximating assets $123,098.43, liabilities $26,022.55. * * *" Thereafter the corporation was required to pay $3.902.81 federal income taxes, which should have been paid prior to the sale and transfer of the stock. The plaintiffs sued to recover this amount on the ground that this was a breach of the express warranty as to the liabilities of the corporation. Mrs. Taylor defended on the ground that she had no knowledge of this income tax matter, and that one of the purchasers of the stock, who worked for the company, was in better position to know the value of the stock than she. This Court, in sustaining a directed verdict for plaintiff, said: "The testimony bears out her claim in this respect. But since the appellant signed the written agreement, and it appearing that her execution of that paper was done fairly, freely, and honestly, she is, of course, bound by its terms."
And it was further held: "It seems clear that the language which we have quoted from the contract is an express warranty, so far as that language went."
Therefore, it was held that although Mrs. Taylor had no knowledge of the affairs of the corporation, or that the statement as to the value of the stock was not true, that having sold the stock upon express warranty she was nevertheless liable. The case of Iler v. Jennings, supra, is cited to sustain this principle.
Steele, Receiver, v. Coleman, 129 S.C. 158, 110 S.E., 836. This case holds that a representation as to the value of stock in a corporation is a representation as to a material fact and approves the doctrine of Iler v. Jennings, supra, to the effect "that any direct representation by a director of a corporation as to its financial status, with a view of inducing a stranger to buy its stock, and acted upon by the buyer, is an express warranty, whether the seller knew the facts were as represented or not."
Therefore, if the facts of the case bring it under these decisions, the defendants should prevail. As was said by the then Chief Justice Blease in the case of Stone v. School District, 161 S.C. 249, 159 S.E., 536, 538, "As briefly as we can, but with the due regard to our duty * * * we undertake a statement of the facts."
The November and December financial statements, especially the latter, upon which the defendants relied for true information before purchasing the stock, showed an inventory of $300,000.00, plant assets of $300,000.00, and a surplus account of approximately $188,000.00. This would give the stock at $50.00 per share a book value of something like $97.00 plus per share. Norris claims that this statement was false and misleading; that he did not know of it until 1931; that he had no way of knowing the true situation before that time; and that his determination to rescind the contract was formed as soon as he heard that he had been imposed upon in purchasing the stock. So, then, the important question to be decided is as to the correctness of the financial statement, the testimony of the defendants that they bought the stock upon the verity of the statement not being denied. Under the law, as above pointed out, it makes no difference whether Mr. Geer knew of the incorrectness of the financial statement or not. If the statement proved to be materially wrong and the defendants relied upon it to their injury, then they should be relieved of liability upon the ground that the statement furnished them constituted an express warranty. We will, therefore, endeavor to give a comprehensive version of the facts as pertaining to the express warranty as shown in the financial statement, disregarding all allegations of either actual or constructive fraud on the part of Mr. Geer.
We have given an outline of the facts leading up to the sale paying especial attention to the financial statement. In March, 1931, there was sent to Norris the annual statement of the company for the year 1930. Upon a careful study of this report Norris discovered that the inventory amount had been reduced $68,000.00 because of obsolete items and he at once thought that this reduction was unreasonable unless the inventory account was unsound as it appeared in the statement furnished at the time of the purchase of the stock. The testimony shows that Norris then wrote a letter to Mr. M.J. Offers, treasurer of the company, for an explanation of this reduction of inventory and Offers replied that this reduction was made because of obsolete items which had accumulated over a long period of years and that the new inventory was more representative of true, actual value than it had ever been before. The record further shows that Mr. Ralph L. Greene, who had served the company in various capacities for many years and who had every opportunity to know the inventory before and after 1926, testified that practically all of the items charged out of the inventory were obsolete prior to 1926 and should have been charged out prior to that time. It would thus appear that the inventory account of upwards of $300,000.00, as appeared by the statement, was approximately $68.000.00 too much. This would seem sufficient under the decisions heretofore set out to warrant a rescission of the contract, but this is not all.
Testimony was taken at Greenville and at Woonsocket, R.I. At the latter place, the defendants demanded statements or audits of the company for all years prior to 1926. The audits for 1921, the year the company was organized, and for 1924, were missing. There was an audit produced for the first six months of 1923 which gave a rather full history of the partnership and of the corporation, together with a full report of the business after incorporation. All of these records were given to Mr. W.C. Rion, an auditor of recognized ability, then living in Columbia but now deceased. His investigations of the records revealed many facts which did not appear in the statement of December 31, 1926, the statement upon which the stock was bought and sold.
Mr. Rion found that prior to 1921 the business was conducted as a partnership and that John Shambow was the sole owner. In 1921 the business was incorporated and John Shambow owned all of the capital stock. At this time John Shambow appreciated the assets of the company over the valuation of 1920 by $145,800.00 desregarding the fact that some of the properties had been purchased prior to March 1, 1913. It is needless to speculate upon his reason for thus disregarding the method of valuation as provided in the federal income tax law. With this appreciated value. John Shambow turned over the partnership properties to the corporation as having a net worth of $441,391.58 and issued to himself 6,000 shares of stock of no par value. It is also needless to inquire as to his reasons for so doing in the face of the following provision of the internal revenue Act: "Title 26, § 2112. Recognition of Gain or Loss. * * * (b) * * * (5) Transfer to corporation controlled by transferor. No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation."
However, it would appear that this appreciation of the assets and the transfer from the partnership to the corporation enhanced his assets by the sum of $145,800.00. These facts are not very material to the issue for the reason that John Shambow was not directly connected with the company at the time of the sale of Norris. They are more historical than material, although they reflect an overvaluation of the properties even before Judson Mills or Norris and Cox became interested in the corporation.
Mr. Geer bought into the corporation for Judson Mills in the fall of 1922. In 1921 the company had lost about $48,000.00 and had made a small profit of $1,100.00 in 1922, a loss of about $47,000.00 for the two years. For $150,000.00 actually paid, Judson Mills received $150,000.00 of 7 per cent. preferred stock and about one-half of the 6,000 shares of no par value common stock. The question arose as to whether or not interest could be paid on the preferred stock when there was an outstanding deficit and the problem was solved in a most novel, not to say unique, manner. How simple it was, and how satisfactory! The 6,000 shares of no par value stock which had an arbitrary valuation of $441,391.58 were exchanged for 6,000 shares of stock of a par value of $50.00 per share, or $300,000.00 worth of stock. The difference between the value of the no par value stock, $441,391.58, and the par value stock, $300,000.00, or $141,391.58, was credited to surplus and the deficit was no longer apparent. Without a dollar of new money, either in cash or its equivalent, being added to the corporation, it was made to appear that there was no deficit but instead a very material surplus. The true situation, as shown by Mr. Rion, was that even with this manipulation there should have been a deficit of $4,408.42 or the difference between the improper appreciation of the fixed assets of $145,800.00 and the newly created surplus of $141,391.58.
The statement furnished Norris showed a surplus account of some $188,000.00 and we have endeavored to show in the preceding paragraph how the greater part of this surplus originated. Following it further, we find that in December, 1923, the 6,000 shares of par value stock were increased to 7,000 shares and the additional 1,000 shares were shown to have been sold for $40,000.00, a discount of $10,000.00 which was charged to the surplus account. In 1924 it appears that this additional issue of 1,000 shares was canceled. When the cancellation took place, the surplus account was credited with the value thereof, or $50,000.00. Having been charged with the discount of $10,000.00, this left a net gain to the surplus account of $40,000.00. It is not stated who was the "good angel" who brought this stock for $40,000.00 in December, 1923, and donated it to the company in 1924. The effect of this was to once more increase the surplus account, this time by $40,000.00, and yet there was no increase in the assets.
But there is yet more to be said in regard to the surplus account. When Judson Mills bought $150,000.00 of preferred stock, there had been issued preferred stock to the extent of $200,000.00, $50,000.00 having been given to John Shambow for his equity in the corporation. This $50,000.00 item was not charged to the surplus account, as Mr. Rion says it should have been, but was probably charged to the plant account. At any rate, it constituted a burden of $50,000.00 which had to be carried by the corporation and which nowhere appeared in any statement. This should have been another charge against the surplus account but was not so charged, nor did it appear in the financial statement of the corporation submitted to Norris at the time of the purchase, that financial statement being the express warranty of the true condition of the corporation.
Another stock change was made due to losses sustained by the corporation. The Greenville plant had sustained a loss of $218,000.00 in 1924, and over a four-year period the Woonsocket plant had lost upwards of $70,000.00. John Shambow had been "gotten out of the picture," as Mr. Geer describes it, and Mr. Geer was at the head of the company. A reorganization appeared necessary and the following plan was adopted: Mr. Geer surrendered the full amount of the common stock, 6,000 shares at $50.00 per share, $300,000.00, and credited this amount to surplus thereby wiping out the deficit. He also surrendered the $200,000.00 of preferred stock, for which he issued 4,000 shares of new common stock, Judson Mills receiving 3,000 shares of this stock and Mr. Geer receiving, personally, 1,000 shares. His 1,000 shares, valued at $50,000.00, represented the amount he had personally paid John Shambow. The stock purchased by the defendants was from this last issue. New preferred stock of $200,000.00 was issued as a result of this last reorganization and was sold at a discount of $50,000.00.
It is further shown by the testimony of Mr. Rion that from the period of organization in 1921 up to the time the defendants bought in 1927 there had been surrendered $491,391.58 of common stock which had been credited to surplus. It is also shown that throughout the life of the corporation, from 1921 through 1926, the total losses were over $245,000.00, this item of loss not appearing in any statement.
The surplus account, shown in the statement, was calculated to make a would-be purchaser believe that the sum of $188,000.00 was earned surplus, no explanation being given as to its character. According to Mr. Rion, it is the practice of all first-class accountants to "earmark" a surplus when it is other than an earned surplus, and this was not done in the statement of 1926.
With the facts as above set forth, we proceed to consider the two following grounds of appeal as relied upon by the appellants (the ground alleging fraud in the sale of the stock not being further considered for the reason before stated):
(1) Breach of warranty in the sale and (2) laches of the defendants in seeking rescission of the contract. The Circuit Judge disregarded the question most seriously presented by the appellants whereby they claimed that the statement upon which they purchased constituted an express warranty. He held, and cited numerous authorities to sustain his holding, that the law governing the sale of tangibles was the only law applicable and he did not refer to the cases herein-before cited. Following this idea, he held that it was the duty of the purchaser to inspect within a reasonable time to discover defects or that the defects would be waived. We do not think this is the correct principle of law applicable to this case. We do think that the authorities hereinafter cited must govern and to that end we will look further into the facts to determine whether or not there was a breach of an express warranty.
We have heretofore made mention of the testimony of Mr. Offers and of Mr. Greene relative to the surplus account. In reply to this testimony, plaintiff offered as witnesses Mr. P.D. Phillips and Mr. J.A. Murphy. The former had been president of the company for only about four months when the inventory changes were made and knew very little of importance relative to the inventory. His information was gathered largely from Mr. Murphy, the sales manager, and others. The testimony of Mr. Murphy, however, is of more importance.
He testified that in 1929, when the depression hit the country, many cotton mills, which were the customers of Shambow Shuttle Company, changed from old fashioned looms to automatic looms, or went out of business. As a result of this, the company had left on hand a large stock of shuttles which had little or no value. All this came about in 1929 and 1930, he said, and created the obsolescence in the inventory. But the inadequacy of Mr. Murphy's explanation lies in the fact that he also testified that since 1926 his company had filled but few orders for shuttles that were not firm orders; and that on such orders the company had lost but a few hundred dollars. He explained that on such firm orders the Shambow Shuttle Company would make up a large supply of shuttles for a mill, which were held on call for the mill for a year, at the end of which time the shuttles would be shipped and the mill would have to pay for them. Thus it would seem that the company not only had not sustained a great loss on these contracts; and that in the circumstances in which the sale of shuttles was made there could be no great accumulation of rejected shuttles. While no doubt through this period there was a shrinkage of inventory values, this would only make the inventory less valuable, but not obsolete.
Mr. Murphy attempted to fortify this testimony by giving a list of shuttles taken from the 1926 itemized inventory, which shuttles were listed at small or conservative value. This, he said, showed that due allowance had been made for obsolescence in 1926. But Mr. Norris pointed out in his testimony that no accurate understanding as to whether or not an article was obsolete could be arrived at by the value at which it was listed on one particular inventory. It might have been carried at the same value for years before and it might be so carried for years thereafter. Therefore, unless the inventories prior to 1926 and those taken thereafter were available, no definite conclusion could be reached as to whether or not allowance had been made for obsolescence on these items.
It is significant that defendant's counsel made demand upon plaintiff's counsel for all the inventories from 1921 to 1930, both years inclusive. Plaintiff's counsel replied by saying that Mr. Offers could not find the inventories prior to 1926, and that those for the succeeding years were considered by plaintiff's counsel to be utterly irrelevant. But were they irrelevant? If it appeared by the inventories that this same list of shuttles to which Mr. Murphy referred had been carried at the same values before 1926, and from 1926 to 1930, this would strongly corroborate Mr. Offers' conclusion that the big charge off in 1930 was of obsolete items which had accumulated over a long period of years. It is held in the case of Willcox, Ives Co. v. Jeffcoat, 135 S.C. 149, 133 S.E., 463, 464, that "the failure or refusal of a party to produce evidence peculiarly within his knowledge and control, which would have an important bearing upon the facts in dispute, warrants the inference that it would be unfavorable to his contention." And in Smith v. Sou. Ry. Co., 121 S.C. 94, 113 S.E., 465, 466, it is said: "All of this information was necessarily in the power of the plaintiff to furnish; the presumption is that having it and not producing it, the information was to his detriment."
We think the evidence is conclusive of the fact that the inventory was unsound in 1926, before the defendants purchased the stock, and the Circuit Judge was in error in not so holding.
In our opinion, there was error on the part of the Circuit Judge in holding that there was no element of misrepresentation or breach of warranty in regard to the surplus account of about $188,000.00 appearing on the statement upon which the stock was sold. He apparently overlooked the fact that nearly half a million dollars worth of common stock, to be exact $491,391.58, had been surrendered in order that a surplus from time to time might be created and that no mention whatsoever of this fact was made upon the statement upon which the trade for the stock was consummated. Again he concluded that the sale of $150,000.00 of preferred stock, made after the last reorganization, was credited to surplus and thereby constituted real assets. Such could not be the case for two reasons: (1) The additional preferred stock was an additional liability and could not be considered a surplus; capital stock, whether common or preferred, of a fixed par value, is always a liability of the corporation; and (2) this sale of preferred stock was at a discount of $50,000.00 and this discount was charged to the surplus account, thereby reducing it to that extent.
For even a stronger reason, the showing as to surplus on the statement of December 31, 1926, was misleading, the proof showing that no surplus of any nature existed. We have heretofore shown that the surplus account was credited with $141,391.58 at the time the no par value stock was changed to par value stock and that this credit was not justified because the net worth of the corporation was appreciated to the extent of $145,800.00. The surplus account was also credited with $40,000.00 on the alleged sale of 1,000 shares of common stock. Surplus was not charged with the amount of $50,000.00 donated to John Shambow as it should have been since this gift to Shambow was equivalent to a discount of the stock. These three items, to wit, $145,800.00, $40,000.00, and $50,000.00, total $235,800.00, and its readily seen that if these items had been charged to surplus as they should have been the doubtful surplus of $188,466.59 is completely destroyed, leaving a deficit of $47,333.41. The statement of December 31, 1926, should have shown this deficit, and in failing to do so the value of the assets of the corporation was misrepresented to the extent of $235,800.00. It seems hardly necessary to say that this constituted a misrepresentation of a most material fact and it is fair to say that the defendants, had they known of it, would never have purchased the stock.
Error is charged to the Circuit Judge in not holding that the statement was false because it did not show that the company had sustained total losses of $245,000.00. This statement of losses, according to the undisputed testimony of Mr. Rion, is true, but we cannot say that there was error in not including this in the statement submitted to the defendants. Such a statement was not intended to cover the entire history of the corporation but was intended to be, and was, an express warranty of its financial condition at the time of the sale.
The defendants further charged error on the part of the Circuit Judge in holding that at the time of the sale the stock had a book value of $97.00 plus per share. This error on the part of the Circuit Judge is the result of his other findings and, if they had been correct, the conclusion as to the value of the stock found by him would have been inevitable. We have endeavored to show the facts upon a different basis than was found by the Circuit Judge and, hence, his conclusion as to the value of the stock being in complete variance to what we have found, is of necessity an erroneous finding.
It, therefore, appearing that the defendants have sustained by the evidence the points covered by the exceptions; and it appearing that the statement upon which the sale was made was, under the law of this State, an express warranty; and it appearing that the statement was untrue in material particulars, thereby inducing the defendants to enter into the contract of purchase; and it appearing that the defendants were induced to purchase the stock by reason of misleading statements, it is clear that they are entitled to a rescission of the contract of sale and a recovery by them of the amount paid upon the notes, unless they are precluded from same by reason of their delay in asserting their rights and, as to this point, our attention will now be directed.
It is urged by the plaintiff that the defendants were in control of the business, that they had made several visits to the plant at Woonsocket, and that they should have discovered the alleged misrepresentation sooner than they did in order to derive any benefit therefrom. The defendants could not discover defects in the inventory such as appreciated values or correctness of surplus account by a visit to the plant in Woonsocket. They had a right to rely upon the statement as an express warranty of the financial condition of the company and these statements did not show or in any way indicate that there was any misrepresentation until the report for the year 1930 which was received in March, 1931. Prompt notice was then given by the defendants of their intention to rescind the contract. It is appropriate here to say that all evidence with respect to the surplus, the stock changes, the plant values, and everything except the inventory reduction was not revealed until after the suit was brought and the records of the company carefully examined after being introduced in evidence.
We, therefore, see no reason to hold that the defendants be estopped by laches from claiming a rescission of the contract, they having acted promptly upon their first intimation that the statement upon which they purchased the stock was misleading.
For the reasons stated in this opinion, the decree and judgment of the Court below are reversed and the cause is remanded to that Court with instructions to enter a decree dismissing the complaint with costs and awarding judgment in favor of the defendants herein for the amounts paid by each of them on the notes sued upon, together with interest at the legal rate from the dates of such payments. The payments admittedly made are as follows:
By J.D. Cox: January 1, 1928 .................... $ 15,400.00 January 1, 1929 .................... 14,800.00 January 1, 1930 .................... 14,200.00 ___________ Total ............................ $ 44,400.00 By D.L. Norris: January 1, 1928 .................... $ 15,400.00 January 1, 1929 .................... 14,800.00 May 20, 1930 ....................... 4,200.00 ____________ Total ............................ $ 34,400.00 Reversed with directions.MESSRS. JUSTICES STABLER and BONHAM and MR. ACTING ASSOCIATE JUSTICE EUGENE S. BLEASE concur.
MR. JUSTICE CARTER dissents.
Being unable to agree with the conclusion reached in the leading opinion in this case, I most respectfully dissent. The facts and issues involved in the case are clearly set forth in the decree of Judge J. Henry Johnson who heard the case on the Circuit, and, after a careful study of the record in the case, it is my opinion that the evidence amply supports the finding, holding, and conclusion reached by his Honor, and for the reasons stated by Judge Johnson, as set forth in the decree issued by his Honor in the case, I think the said decree and judgment thereon should be affirmed.