Court Opinion

ID: 3851105
Source: CourtListenerOpinion
Date Created: 2016-07-06 08:31:11.849219+00
Date Added: 2024-06-11T07:40:54.361063
License: Public Domain

Argued May 16, 1928.
This bill in equity was filed to obtain redress for loss sustained through the alleged fraud of the defendant, W. Percy Simpson, — herein often referred to as "Simpson," — in the purchase of corporate stock. The Eddystone Manufacturing Company was a corporation, chartered about 1880, and located at Eddystone, near Philadelphia, with a capital stock of $1,000,000, divided into 10,000 shares of $100 each, of which stock Lincoln Godfrey, now deceased, and the Philadelphia Trust, Safe Deposit and Insurance Company, held 5140 shares as trustees of the estates of Thomas Simpson and others. Near the close of 1902, Simpson, being the owner personally *Page 581 
and as trustee of some 3100 shares of the stock of the same company, conceived the idea of acquiring sufficient additional shares to give him a controlling interest in the corporation. Godfrey was his uncle by marriage and the Simpsons, for whom the majority interest was held in trust, were his blood relatives. Godfrey was president and the defendant a director of the corporation. They were also jointly interested in a partnership acting as sales agent for the corporation. While the relations of all the above named parties were friendly, defendant thought he could more readily acquire the necessary stock from the trustees through a third party, without being known as purchaser. He therefore employed as his agent for that purpose, Frank P. Hays, a St. Louis banker, who early in January, 1903, approached the trustees with reference thereto. The latter refused to negotiate for a sale of a part of their holdings, by which they would lose control of the corporation, but offered to entertain a proposition for the sale of their entire 5140 shares. This Hays declined, but thereupon he and the defendant entered into a fraudulent scheme by which Hays would ostensibly buy the entire 5140 shares, but have the contract so drawn that upon securing the desired number of shares he could escape further liability on paying a specified amount as liquidated damages. Thus armed, Hays renewed the negotiations for the 5140 shares on the basis that his clients, declining to disclose their identity, were then prepared to make such purchase. The trustees consulted the defendant about the proposed sale of their stock and he, to forestall any suspicion that he might be interested in the purchase, showed them a fake letter which he had procured from Hays offering to buy his stock. After some negotiations, the trustees agreed to sell Hays their entire stock at $135 per share. Hays's telegram, accepting their proposition was as follows: "Gentlemen: — Your proposition to us of date March 13, 1903, offering to us for sale 5140 shares, at *Page 582 
$135 a share, of the capital stock of the Eddystone Manufacturing Company, doing business chiefly at Eddystone, Pennsylvania, received and the same is accepted." The contract as drawn, provides payment for the stock in eight monthly installments and delivery of the stock monthly as paid for. The payments of $80,125 each, for April, May and June, 1903, were made and the 1725 shares of stock thus paid for were delivered accordingly. This, with 175 shares bought of a Mrs. Valentine, gave defendant control of the corporation. It is admitted by both Simpson and Hays that when they arranged for the purchase of this stock, it was definitely understood between them that Simpson would take the 1725 shares only. Their pretense of buying the whole amount was intended to deceive the trustees. In view of which, Simpson had incorporated in the contract the following provisions, viz.: "If at any time you [Hays] shall fail or refuse to make the payments herein required to be made, you shall forfeit to, and the undersigned shall retain free from any claim by you or any person or persons claiming by, through or under you, the sums over paid and remaining in our hands at each time of paying and delivery as follows," and then provides, inter alia, that after the third payment, such failure shall cause a forfeiture of $7,500, as liquidated damages.
As soon as the contract was executed, Hays, under defendant's instructions, began preparations for the intended default. He asked the corporation's president for statements as to resources, liabilities, profits, losses, prospects, inventories, etc., also for a copy of the bylaws and requested that his clients might have a representative on the board of directors. Hays, in addition, sent an expert to make a thorough examination of the property and submit an elaborate report, which was done. This entailed considerable expense, which Simpson justified on the ground that it might avoid future trouble. Hays also spoke of the discouraging outlook for that line of business and the stringency of the money *Page 583 
market. When the July payment came due, he wrote that his clients were not in harmony as to the venture, and some days later wrote the trustees that he was compelled to abandon further payments and allow the $7,500 forfeiture, which he did. To keep up the deception, Hays continued to correspond with Godfrey and to speak of the 1725 shares of stock as that of his clients and renewed the request for representation on the board of directors. Meantime, Simpson made a formal proposition to buy a small corner of the corporation's lot at Eddystone, but withdrew it when it was suggested that it might complicate matters with our St. Louis people, he remarking that "of course we can no longer adjust such matters among ourselves." During the summer of 1903, Simpson went through the formality of buying the 1725 shares of stock from Hays at $100 a share, although Hays never had a dollar of interest in them. When chided by Godfrey for buying from outsiders in place of buying from the trustees, Simpson replied that he had done so to keep the stock in the family and from possibly falling into hostile hands.
The same year Simpson assumed control of the corporation, had himself elected president thereof and his salary fixed at $15,000 a year, at which it continued for fifteen years, although his predecessor had not, just previously, received any salary. The voluminous correspondence, of over a hundred letters, extending nearly a year, largely by and between Simpson and Hays (too extended for quotation here), discloses on their part, falsehood, cunning and deceit seldom equalled in human transactions, and fully justifies the finding of the chancellor, affirmed by the court in banc, of affirmative, actionable fraud. Even an expression "of intention, purpose or opinion, may amount to a statement of fact, as where a person fraudulently misrepresents his intention in doing a particular act to the damage of another": Standard Elevator Co. v. Wilson,218 Pa. 280, 281. *Page 584 
This fraud, however, occurred in 1903 and this bill was not filed until 1926, and we are confronted by the statute of limitations. Here again we agree with the chancellor and court in banc that the defendant and Hays took such active and skilful means to conceal the fraud as to toll the statute. Simpson's letters abound in exhortations to Hays to conceal what took place relating to the purchase of the stock and said, in effect, that a single exposed letter would be fatal. Beginning with the day the contract was made they employed a code in their correspondence, and in addition Simpson requested and received a return of the letters he had written Hays. Some months after the transaction was closed, Simpson, in writing Hays, earnestly requested not only that he, but all others in his bank, who had knowledge of the transaction, remain indefinitely silent with reference thereto. In the fall of 1903, Godfrey made a visit of investigation to St. Louis and Simpson, knowing of his intention, wrote Hays, in effect, to entertain him nicely, take him out for a ride, etc., but give him no information, which advice was followed. It does not appear that the trustees could have done more to uncover the fraud. Twenty-three years later, Simpson's letter-press book, which he had neglected to destroy, came for the first time to the knowledge and possession of the surviving trustee. It disclosed the fraudulent transaction and was promptly followed by the filing of this bill. Where active steps are taken to conceal fraud, the statute of limitations does not commence to run until its discovery: Smith v. Blachley, 188 Pa. 550; Hughes v. Bank, 110 Pa. 428; Morgan et al. v. Tener et al., 83 Pa. 305. As stated by Mr. Justice FRAZER, speaking for the court, in Hall v. Penna. R. R. Co., 257 Pa. 54, 63: "Where some affirmative act of concealment takes place it is not material whether the concealment is previous, or subsequent, to the beginning of the cause of action. The question is whether there was a design to prevent the discovery of the facts *Page 585 
which gave rise to the action and whether the act operated as a means of concealment." In Higgins v. Crouse, 147 N.Y. 411,42 N.E. 6, the court, because of fraudulent concealment, sustained an action for fraud brought approximately twenty-four years after the cause of action arose. The trustees, in the instant case, had neither knowledge nor the means of knowledge, and are not chargeable with laches. As stated by former Chief Justice BROWN, in Edwards v. Western Maryland Ry. Co., 268 Pa. 228,230: "The question of laches does not depend, as does the statute of limitations, upon the fact that a certain definite time has elapsed since the cause of action accrued, but whether, under the circumstances of the particular case, plaintiff is chargeable with want of due diligence in failing to institute or prosecute his proceeding: Townsend v. Vanderwerker, 160 U.S. 383." Laches does not depend upon the statute of limitations, but whether due diligence has been shown: McGrann v. Allen et al., 291 Pa. 574. The bill in the instant case, as filed, prayed for specific performance of the contract, but as the corporation had recently authorized an issue of preferred stock to the par value of one million dollars, to which plaintiff had assented, such decree could not be granted (otherwise it might have been; see Rumsey v. Railroad Co., 203 Pa. 579; 36 Cyc. 560, 562), and the prayer of the bill was amended so as to ask a decree for damages, which the court in banc awarded. Defendant has appealed.
While defendant's answer avers an adequate remedy at law, no steps were taken to have that question decided in limine, as required by the Act of June 7, 1907, P. L. 440. Hence, the case was properly proceeded with in equity: Bank of Pittsburgh v. Purcell et ux., 286 Pa. 114; New York  Pa. Co. v. N.Y. Central R. R. Co., 280 Pa. 297.
On the question of damages, it is clear that, by the fraud complained of, the trustees were deprived of a right, viz., the control of the corporation, which the *Page 586 
answer concedes was valuable. We agree with the lower court that the value of the stock carrying such control must be treated as worth the contract price, to-wit, $135 per share. The question is, what was the fair value of the 3415 shares left in the hands of the trustees after the defendant had secured the balance and therewith the control of the corporation. This was what might be termed a closed corporation, in which the stock had no fixed market value, but was of the par value of $100 a share, had a book value of $173 and according to the statement of Godfrey, president of the corporation and also one of the trustees, liquidation value of $100 per share. At the same time the trustees offered some of this stock to defendant at $110 a share, and in the latter's pretended purchase from Hays the stock was valued at $100. This latter fact would be evidence against Simpson. Prior to 1903 the corporation had in general a large earning capacity, and, subsequently, one on the average much smaller. In our opinion, the court in banc erred in fixing the value of the stock in question at $60 a share on the basis of earnings since 1903 and of two small sales made in 1926, ignoring all the other facts and circumstances bearing on the question of value in 1903. Of all the evidence, we conclude the most reliable as to value of the stock remaining in the hands of the trustees, after they had lost a controlling interest in the corporation, was the price they asked therefor, to-wit, $110 a share, which we adopt. Thereunder, plaintiff's damages were the difference between the contract price of $135 and that, or $25 a share on the 3415 shares, in all $85,375, from which the $7,500 paid on account of the prearranged breach of contract should be deducted, leaving a balance of $77,875. The rule as to stock value in such case is stated by Mr. Justice KEPHART, in McWilliams v. Altemus, 288 Pa. 277, 279, that: "Where stock has been issued which has no market value, the intrinsic or real worth is the measure of damages: Duroth Mfg. Co. v. Cauffiel,243 Pa. 24, *Page 587 
30. In an action to assess damages for breach of contract which promised, as one of the considerations, common stock of a company to be organized, but which was not, the measure of damages is the intrinsic or real value as of the date it should have been issued, and as though issued. This may be shown by evidence of the net worth of the assets or by evidence of the net profit [citing authorities]. The law does not require absolute accuracy in arriving at such value, but a reasonable degree of certainty grounded on a definite basis will suffice: Cornelius v. Lytle, 246 Pa. 205, 209; Wilson v. Wernwag,217 Pa. 82, 94." "Substantial justice is better than exact injustice": Osterling v. Frick et al., Exrs., 284 Pa. 397, 404.
As defendant had the benefit of his fraud from the date of its commission, there is no injustice in requiring him, as the court in banc did, to pay damages for delay equal to what would be simple interest, which from July 1, 1903, to July 1, 1928, amounts to $116,812.50; this added to the principal makes the total amount $194,687.50. The opinion of Mr. Justice KEPHART, in Whitcomb v. Philadelphia, 264 Pa. 277, contains an elaborate discussion on the question of damages for delay in actions ex delicto. Our views, above expressed as to damages, are not in conflict with Virginia v. West Virginia, 238 U.S. 202, as we understand that case.
The decree is modified by reducing the amount thereof from $616,590 to $194,687.50, with interest thereon from July 1, 1928; and, as so modified, is affirmed at the cost of appellant.