Case Name: P. T. HURLEY, Appellant, v. W. H. WILEY and EMMA A. WILKY, Appellees
Court: Arizona Supreme Court
Jurisdiction: Arizona
Decision Date: 1916-03-25
Citations: 18 Ariz. 45
Docket Number: Civil No. 1494
Parties: P. T. HURLEY, Appellant, v. W. H. WILEY and EMMA A. WILKY, Appellees.
Judges: 
Reporter: Arizona Reports
Volume: 18
Pages: 45–55

Head Matter:
[Civil No. 1494.
Filed March 25, 1916.]
[156 Pac. 83.]
P. T. HURLEY, Appellant, v. W. H. WILEY and EMMA A. WILKY, Appellees.
1. Corporations — Sale of Stock — Contracts—Meeting of Minds.— Where the maker of a note intended it as the purchase price of stock in an insurance company, while the payee believed he was selling stock in a holding corporation-, there was no meeting of the minds and no binding contract as to the sale of the stock.
2. Corporations — Sale op Stock — Estoppel.—The failure of one who thought he was buying stock in an insurance company, and who gave a note for the purchase price, to examine the certificate attached to the note at the time he executed a renewal note, which would have disclosed that it was for stock in a holding company, did not, in the absence of anything to arouse his suspicions, or any action by the other party to his injury, estop the maker from setting up want of consideration for the note.
8. Bills and Notes — Defenses—Want op Consideration — Renewal Note. — Between the original parties to a note, the defense of want of consideration can be urged against a renewal note as well as against the original note.
4. Bills and Notes — Defenses Against Innocent Purchasers— Fraud and Want op Consideration. — The defenses of fraud and want of consideration cannot be interposed against a bona fide purchaser for value in due course.
5. Corporations — Sale of Stock — Fraud—Representations op Increase. — A representation by the seller of corporate stock that it would increase to a certain price within a year, and that he would guarantee to sell it for that if given the privilege, is not fraudulent.
6. Bills and Notes — Burden op Proof — Fraud—Want op Consideration. — In an action on a note, fraud and want of consideration are affirmative defenses, which must be established by defendant by clear and convincing proof.
[As to burden of proving fairness of transaction, see note in Ann Cas. 1912A, 704.]
'APPEAL from a judgment of the Superior Court of the County of Maricopa. R. C. Stanford, Judge.
Reversed and remanded.
Messrs. Armstrong & Lewis, for Appellant.
Messrs. Cox & Phelps, for Appellees.

Opinion:
ROSS, C. J.
This action was instituted by appellant, P. T. Hurley, to recover $2,000 on a note dated May 12, 1913, of which appellees were the makers and appellant the payee. The note, as shown upon its face, was secured by "1,000 shares of Arizona Eire stock as collateral." The appellees' defense to the note was: First, want of consideration; and, second, fraud in its obtaining. The case was tried to á jury, whose verdict was in favor of appellees; judgment was entered ae cordingly. This appeal is prosecuted from the judgment and also the order overruling motion for a new trial.
The appellant's specifications of error are that the court erred in the admission of evidence on the part of the appellees, in overruling the appellant's motion for a directed verdict at the conclusion of the case, and in instructions given to the jury at the request of appellees and upon its own motion. If there be anything to appellant's first assignment of error, which we doubt, it is of minor importance, and, we gather, was so viewed by the appellant in the trial of the cause, for the reason that, whereas some objections were interposed in the early stages of the trial, later on both sides took, and were permitted, great latitude in the questions propounded, both on -direct and cross-examinations of the witnesses, with the very commendable purpose, as we conceive it, of trying to reach the real merits of the case. If any errors were committed in the admission of evidence, it is not in the character of the evidence so much as in the manner of its presentation, and, therefore, could hardly prejudice the rights of the appellant.
However, it is contended by the appellant that the evidence wholly failed to sustain the allegations of defendants' answer, alleging want of consideration and fraud. The facts as disclosed by the answer and the evidence, succinctly stated, are as follows: The appellant was the owner of some of the capital stock of the Arizona Finance Company, capitalized at $500,-000, which was the holding company of the Arizona Fire Insurance Company, capitalized at $200,000, and its whole assets •consisted of the capital stock of the latter company. In the month of March, 1912, appellee W. H. Wilky, dealing with one E. A. Ensign, who represented himself to be the agent of the Arizona Fire Insurance Company, purchased, or undertook to purchase, 1,000 shares of the treasury stock of said company at $2 per share, and gave his note in payment thereof, due in twelve months, said note being payable to the maker's order; that is, to ' ' myself. ' ' Ensign was not the agent of the Arizona Fire Insurance Company, and had no authority from said company to sell any of its stock. He was the agent of appellant, Hurley, from whom he had authority to sell on commission the latter's stock in the Arizona Finance Company. At the time of the execution of the note, no certificate of stock was -exhibited or delivered to Wilky. After he had signed the note for $2,000, he indorsed it in blank. Shortly thereafter the note turned up in the hands of appellant, Hurley, as the owner thereof, it having been given to him by his agent Ensign as the purchase price of 1,000 shares of the Arizona Finance Company stock. He thereupon indorsed the same over to Dr. Win Wylie, who discounted the note for $1,880, of which appellant received $1,400, and the agent who negotiated the sale, $480. When the note became due the holder thereof, Dr. Wylie, placed it in the hands of his attorneys for collection. Wilky, when threatened with a lawsuit, saw Hurley and informed him that he was unable to pay the note, offered to surrender to Hurley the stock that he had contracted for if Hurley would cancel his obligation. Hurley then offered to, and did, borrow $2,000 with which to pay the note. The note was paid by Hurley, with the agreement that Wilky would execute his note to Hurley for $2,000, which is the note sued upon. At the time of its execution, or shortly thereafter, Hurley requested that Mrs. Wilky sign the note with her husband, which was done. The evidence is undisputed that appellee Wilky thought he bought 1,000 shares of the treasury stock of the Arizona Fire Insurance Company; that Ensign represented to him that he was selling him treasury stock of that company. It is also shown that none of the stock of the Arizona Fire Insurance Company was or could be issued to the general public; that the only stock that had ever been sold to the general public was the stock of the Arizona Finance Company, which was generally spoken of and known as "Arizona Fire stock. ' ' There is nothing in the record, however, to show that Wilky knew that there was any such company as the Arizona Finance Company. He says in his testimony that he did not know of such company until he was sued. The certificate of stock representing 1,000 shares was not issued to appellee Wilky, but was issued in the name of Win Wylie. In fact, no stock of either company of any kind was ever issued directly to appellee Wilky. This certificate of stock was attached to the Wylie note, and when that note was paid off and surrendered to appellee, it was attached to the note sued on. Wilky testified that he did not have hold of it or examine the certificate; that he only saw it in the hands of appellant, Hurley, and that at the time he signed the last note he was still of the opinion that it represented 1,000 shares of the treas ury stock of the Arizona Fire Insurance Company. His statement in that regard is undisputed.
The above state of facts suggest two questions: First, Did the minds of the parties ever meet, so as to make a binding contract, or was the conduct of the parties such as to create a contract by implication of law ? Second, Did the giving of a new note, signed by the appellee and his wife, in lieu of the old note, have the effect of precluding or estopping appellee from setting up a want of consideration ?
Answering the first question, the evidence shows without contradiction that the appellee thought he was buying Arizona Fire Insurance Company stock, and this delusion remained with him until he was sued. It is equally as certain that the appellant believed he was selling appellee Arizona Finance stock. It is quite clear that no binding contract was entered into by agreement, the all-essential element of every contract— the meeting of the minds of the parties — not having occurred.
Nor do we think a contract resulted from the conduct of the parties by operation of law, for the reason that the seller of the stock did not issue, or cause to be issued, any certificate thereof to the purchaser, and the latter not having seen or had in his possession any certificate of stock issued to himself, might reasonably have relied upon his contract as he understood it and expected to receive shares of stock of the Arizona Fire Insurance Company in payment of his note. Nor do we think his neglect to examine the certificate attached to the note issued in the name of Dr. Wylie, and make inquiry as to its meaning, in the absence of a showing that appellant's rights had been prejudiced without his fault, should preclude him from showing what he understood his contract to be. Nothing had been said or done to arouse or excite his suspicions that he would not get the stock he had bargained for as soon as his note was paid, and he, not being in a position to demand the stock, was charged with no imperative duty to scrutinize and examine the certificate attached to the Wylie note or the renewal note. We do not feel that his oversight or neglect to investigate more thoroughly, doubtless born of his confidence in the seller to give him the thing he thought he was buying, estops him from showing the real transaction, especially under the facts of this case.
At the time of the giving of the renewal note the appellee at least, and perhaps the appellant, was laboring under the same delusions as when the first note was executed; that is, the appellee was laboring under the impression that he was paying for 1,000 shares of the Arizona Fire Insurance Company .stock, whereas the appellant thought he was being paid for 1,000 shares of the Arizona Finance Company stock. The first note was not made payable to the appellant or his order, but to the order of the maker, Wilky. It was, however, immediately turned over to appellant as his property. While his name did not appear in the note as payee, he was in fact the payee, as shown by the subsequent transactions. He sold the note and received the proceeds thereof. In the renewal note he is made the payee.
There is no element of innocent purchaser for value involved in the case. As between Wylie and Wilky, assuming that Wylie was a tona fide purchaser for value in due course, the •appellee would not have been permitted to interpose the defenses of fraud or want of consideration. But as between the original parties, their privies and purchasers of the notes with notice, the rule, as we understand it, will permit the defenses of fraud or want of consideration, not only to the original note, but also to the renewal note. It is stated in Cyc., volume 7, page 880, as follows:
"As between the original parties, and as against transferees -who are not tona fide purchasers for value, a renewal note is •open to all defenses which touch the consideration of the original note, as want or failure of consideration, fraud, usury, or other illegality. ' '
Daniel on Negotiable Instruments, section 177, states the rule as follows:
"That the bill or note has been lost or stolen, or was exe•cuted under the exercise of undue influence, or under duress, or under fraudulent misrepresentations, or for fraudulent consideration, or for illegal consideration, or has been fraudulently obtained from an intermediate holder, or been in any -way the subject of fraud or felony, or has been misappro-priated and diverted, or that it was given as collateral security, or for a loss for which party was not liable, or that otherwise it was without valuable consideration, is a good •defense as between the parties privy to it. And in some eases that it was given by mistake for too great a sum, or when no sum was due, the evidence showing fraud or a total or partial want of consideration. The same defense which the defendant might make to an action by an indorsee of the note given by him, and the same requirement of proof may be made by him in an action on a renewal of a former note, both notes being regarded as given upon the same consideration."
And at section 205 he says:
"When the first note was without consideration, a renewal note is also. ' '
We think the issue of want of consideration was properly submitted to the jury, and that the court did not err in refusing an instructed verdict at the close of appellee's case.
We do not deem it necessary to discuss the alleged fraud features of the case further than we have touched upon them in the discussion of the other question. Stress is laid upon the representation of appellant's agent that the stock would go up to $3 within a year, and that he would guarantee to sell it for that much if given the privilege. Such and kindred statements, if made, would not constitute fraud.
We do not think the instructions given at the request of the appellees, and of which complaint is made, misstate the law as applied to the facts of this case. However, the court on its own motion told the jury that:
"Unless the plaintiff satisfies you throughout the entire ease of the correctness of his story to such an extent that it outweighs the proof of the defendant, he cannot recover; in other words, if the testimony is evenly balanced, it shows that there is some doubt in your minds; that is not sufficient. That is, if the testimony of the plaintiff weighs just the same as that of the defendant, you must find for the defendant. The plaintiff can only recover where his testimony outweighs that of the defendant."
This instruction states a correct proposition of law when applied to an ordinary case, for the reason that the plaintiff usually assumes the affirmative, but it has no application to the facts of this case. In the first place, the presumption is that the note sued upon was given for a valuable consideration and free from any fraud or imposition. Appellees dispute this presumption and allege in their answer that the note was given without consideration, and that fraud was practiced upon them to secure the note. These are affirmative defenses and, of course, must be established by clear and convincing proof. It was incumbent upon the appellees to establish these defenses by a preponderance of the evidence, and it was error for the court to take from them this burden and place it upon the appellant.
For this error it is necessary that the case be reversed and remanded for a new trial, and it is accordingly ordered.
FRANKLIN, J., concurs.