Case Name: Jackson v. Stockert et al.
Court: Supreme Court of Appeals of West Virginia
Jurisdiction: West Virginia
Decision Date: 1915-01-14
Citations: 75 W. Va. 482
Docket Number: 
Parties: Jackson v. Stockert et al.
Judges: 
Reporter: West Virginia Supreme Court
Volume: 75
Pages: 482–494

Head Matter:
CHARLESTON
Jackson v. Stockert et al.
Submitted November 17, 1914.
Decided January 14, 1915.
1. Corporations — Sale of Sloah — Setting Aside — Fraud.
Equity has jurisdiction to cancel a sale of shares of stock in a corporation, fraudulently procured, (p.483).
2. Same — Sale of Stock — Rescission—Grounds■—Representation of Fact.
Ealse statements to the purchaser, by the seller of such stock, that he had1 paid in full therefor, and that the corporation had earned $15,000 net in the year preceding, which statements the purchaser believed to be true, and was thereby induced to buy the stock, is good ground for rescinding the sale. Such statements are repre-sensations of facts, and not of mere opinions, (p.484).
(Robinson and Lynch, Judges, dissenting.)
Appeal from Circuit Court, Upshiir Comity.
Suit by Charles F. Jackson and others against G. F. Stock-ert and others. Prom decree for defendants, plaintiffs appeal.
Reversed and Rendered.
G. M. Fleming and C. C. Higginbotham, for appellants.
U. G. Yotmg, for appellees.

Opinion:
Williams, Judge:
Plaintiff purchased from defendant fifty shares of capital stock of the Buckhannon Water and Light Company, of the par value of $100 per share, paying therefor $5,000, its par value. This suit is brought to rescind the sale and recover back the purchase money on the ground that plaintiff was fraudulently induced to buy the stock by certain alleged false statements and representations made to him by defendant. Plaintiff avers that defendant represented to him that he had paid in full for his stock and that he was the only stockholder who had paid in full; that the year before the plant had earned a clear profit of $15,000, and he thought it would make $20,000 that year. Tie avers that he believed those statements to be true and was thereby induced to buy the stock, but that they were in fact false and untrue, and were known so to be by defendant at the time they were made. He also avers that there was a mortgage indebtedness of about $85,000 upon the plant, of which he had no knowledge until after he had bought the stock, and offers to return the certificate of stocks on return of the purchase money with interest. Defendant answered, specifically denying each allegation of the bill, plaintiff replied generally and depositions were taken by both parties, but before the cause was heard plaintiff departed this life. The suit was then revived in the name of Charles P. Jackson and Edward W. Jackson, plaintiff's executors, and on the 30th December, 1912, was finally heard on pleadings and proof, and a final decree pronounced denying relief on the merits and dismissing the bill, and plaintiffs have appealed.
Jurisdiction in equity was challenged in the court below by demurrer, which the court properly overruled. That equity jurisdiction exists in all cases where fraud is properly charged as the grounds for relief, is too well established to require argument, or citation of authorities. But it is proper to state that counsel for appellee has abandoned his contention of want of equity jurisdiction, and in his brief admits it, provided the fraud is properly charged. But he insists that the charges in the bill relate to matters of opinion merely, and do not constitute fraud even if they afterwards turned out not to be true. But we do not think the matters charged as false and fraudulent relate to mere opinion. Some of them relate to facts that either had, or had not, an existence at the time. We, therefore, think the bill states a good cause for relief in equity.
The question we have to consider then relates to the proof, the weight of evidence, depending chiefly, but not wholly, upon conflicting testimony of the two interested parties. They flatly contradict each other on the most material facts. Defendant was the owner of one hundred and forty shares of stock, was one of the organizers and' a director of the corporation. He was also, at the time of the sale, and had been for some time before, its general manager. The corporation was a close one, composed of nine or ten stockholders, each having subscribed to ten thousand dollars of the capital stock, which was to be $100,000. Only a small part of the capital subscribed seems to have been paid into the treasury. At the time of the stock sale in question, there appears to have been an unpaid bond issue amounting to $80,500 or about that sum, secured by deed of trust on the company's plant. Plaintiff wished to make a permanent investment of $5,000 for the benefit of an infant daughter, and spoke a number of times to defendant about buying some stock in the Buck-hannon Water and Light Company. Defendant told him the stock was not for sale, and offered to sell him some bonds, but plaintiff said he did not want the bonds because they were liable to be paid off in a few years, and he wanted to make a longer investment. Defendant says the stockholders had agreed among themselves not to sell any of their stock to a stranger to the corporation. Frequent conversations were had between them, extending back over several months before the sale. Defendant says he never went to plaintiff to sell, but that plaintiff always came to him to buy. Plaintiff admits that he went to defendant, about a year before the sale when the company's books were first opened, and offered to buy stock, and says defendant told him it was all sold, and proposed to sell him twenty year bonds, but that he told him he did not want bonds. He further says: ' ' that was the last conversation we had, until lié came to my house and told me he had bought some stock and I could buy some stock, that he would let me have as a favor, as I had always been a special friend of his. That he had named it to the company and they asked him if I was a good man and he told them I was, and a special friend of his." Plaintiff says he did not know of the existence^ of the mortgage, but defendant denies this, and says Re explained tRe mortgage to Rim. Bnt whether Re did or not, plaintiff's own admission that, defendant Rad previously offered to sell Rim bonds would seem to be enough to put Rim upon inquiry concerning tRe lien on tRe property. A corporation would Rardly be offering its bonds for sale without first having secured them by a lien of some kind upon its visible property. Plaintiff was familiar with methods of business by corporations, he was a stockholder and director in a bank, and was interested as stockholder in a number of other corporations, and Re would not likely be misled concerning a mortgage on the company's plant, when Re knew its bonds were on the market. Whether the trust deed exhibited with the bill is the one then in existence, we are not able to determine. Plaintiff purchased the stock on 25th January, 1907, and the deed of trust, spoken of as a mortgage, bears date December 1, 1906, and was not recorded until 20th February, 1907, nearly a month after the stock transaction was had. It is not likely 'the company would be selling its bonds before the security was recorded. Furthermore, defendant himself says he does not think that deed of trust, or the proposed bond issue under it, was ever carried into effect. It may be, therefore, that the bonds that defendant proposed to sell, were bonds of another and previous issue; or they may have been bonds of the issue then contemplated, but never consummated. The record leaves that question in doubt.
Plaintiff swears that, at the time he bought the stock, -defendant told him the plant had made a net profit of $15,000 in that year, (1906), after paying interest and all expenses; that in a year or two it would pay a big thing; that the reason no dividends had been declared was because the earnings had all been used to extend the water mains and increase the capacity of the plant; that he invited him to the office to inspect the company's books. He says he went to examine the books, but they could not be found;- that plaintiff told bim he had paid for all his stock and did not think any of the other stockholders had paid for theirs; that he believed those statements to be true; and that, if he had not believed them as true and relied on them, he would not have bought the stock. Defendant denies.making some of those statements, and others he admits he made and insists that they are true. The two which we think are material, as being statements of facts, and not mere matter of opinion, are (1) the statement that the plant had earned $15,000 net in 1906; and (2) that he had paid in full for his stock. Defendant denies having made the first statement, but admits making the second and insists that he had.paid in full for all his shares of stock. The falsity of the first statement, if it was made, is virtually admitted. Defendant does not claim, in his testimony, that the net earnings of the plant, for the year 1906, amounted to much, and from other parts of the record it appeárs to have been only $39.61. But he denies that he made that statement. He swears he did not tell plaintiff what the net earnings were, but says he told him the gross earnings for that year were $19,700. Here is direct conflict between them, but we think a decided preponderance in the scale exists in favor of plaintiff. In the first place he is corroborated by his son Charles D. Jackson, who swears he was present when the deal was made and heard defendant tell his father the plant had earned $15,000 net. Defendant does not deny that plaintiff's son Avas present, but says, if he was, he has no recollection of it. Plaintiff and his son both swear that the son was present. Plaintiff says he asked his son to go along with him to examine the company's books, and that the books could not be found when, they got to defendant's office. The testimony is also flatly contradictory concerning the place where the sale occurred. Defendant says it took place at plaintiff's house, whereas plaintiff and his son both say it was at defendant's office. However, the place is not material, but we mention it as showing the many points of conflict between them. Defendant does not deny that he invited plaintiff to inspect the books, and that when he came to his office, the books could not be found. His testimony on that point is as follows: "Q. Mr. Jackson also says among other things, you referred him to the books and that he was to come down town that day or the next day; that.you told him to come down to your office and that you found the books were not there and that you called in his son Charlie Jackson and made a statement to him of the contract and the facts and why you could not get the books. I will ask you to state whether or not such conversation occurred between you? Ans. I don't remember of anything of that kind ever occurring, and if Charlie Jackson was ever in my office in his life time I don't remember it. Ed has been in my office several times, hut I don't remember of Charlie Jackson ever being in my office. Q. Did you close the deal in your office? Ans. No sir up at Mr. Jackson's house;" Moreover, plaintiff and defendant both appear to have been experienced business men, and it is more consonant with reason that the conversation should have related to the net, rather than to the gross earnings, for the profit to the stockholders would be determined by the former and not by the latter. The gross earnings, however large they may have been, would not indicate actual earnings, unless the operating expenses had also been given, and defendant does not pretend that he told plaintiff what the operating expenses were.
Concerning defendant's claim that he had in fact paid for his stock in full, we do not think it is borne out by the record. He was general manager of the company, and superintended the erection of the buildings and the installation of its plant, and claims that, for those and other services rendered, he was paid in capital stock amounting- to $14,000. But it appears from a statement of the company's accounts filed with his deposition, the correctness of which he admits, that his services in full to 1st December, 1906, were paid for with $4,000 worth of stock and two $500 bonds. He owned 140 shares, and he does not claim to have paid more than $1070 in money, the balance he claims to have paid in two and a half years services for which, he says, he was to be paid $100 per month, but for which the company allowed him only $70 per month. Some of his salary, he says, was paid in money and some in stock. AVhen asked how much of his salary went into the $10,000 of stock for which he had subscribed, he replied that he did not then know exactly, and continuing his answer, said: "When we first commenced building the plant we put in so much money and then they give me $100 a month salary that I paid on the stock and then give me so much stock extra as a gift; that all made up $10,000." His salary at $70 per month, for two and a half years, amounts to $2,100, to which, if we add the cash he paid in, $1070, we have $3,170. That is all he has proven he paid for 140 shares, of the par value of $14,000. But he does not claim to have been paid all his salary in stock, some of it, he says, was paid in cash. 'Without detailing the evidence further, we think it is proven that defendant held 100 shares of stock in consideration of $1,070 cash paid in, and 40 additional shares for services rendered to the company. Only a small per cent of the par value of the stock appears to have been paid into the treasury of the company by any stockholder. Therefore, the statement he made to plaintiff, that he had paid for his stock in full, and that he was the only stockholder who had, was not true, and was misleading. It may be true that he paid a greater per cent on his stock than other stockholders, in that he seems to have paid in full, in services performed, for 40 of his 140 shares. The other stockholders appear to have paid in only about $1,070 on their several holdings of 100 shares of stock.
It is shown that some of the stock was sold at auction and brought a small price, which would indicate that it is not of much value, but that fact is not material. Plaintiff's right to relief does not depend upon the value of the stock, but upon the fact that he was fraudulently misled by defendant into buying it. The case is one which, in equity and good conscience, calls for relief. We reverse the decree complained of, and will enter si^ch decree here as the lower court should have entered, decreeing plaintiff a recovery of the-money paid, with interest thereon from the time of payment, on his surrendering to defendant the certificate of stock.
Reversed and Rendered.