190 Iowa 83 | Iowa | 1920
Lead Opinion
— "William P. Bettendorf died intestate, June 3, 1910. He left a widow, Elizabeth H., whom he had married September 9, 1908, his first wife having departed this life several years before. He was without children; but a father and mother, Michael and Katherine Bettendorf, and one brother, J. "W. Bettendorf, survived him. Aside from household furniture, life insurance, patents, and royalties owed for their use, his estate consisted of 643 shares of the capital stock, consisting of 1,000 shares of the par value of $100 each, issued by the Bettendorf Axle Company. This property, other than such as was exempt to the widow, passed to the administrator, J. W. Bettendorf, who qualified as such a few days after decedent’s death. No claims were filed; and, save the cost of administration, the widow was entitled to one half of the estate, and the parents to the other half.
The Bettendorf Axle Company was incorporated on January 1, 1895, with a capital of $500,000; $100,000 in common stock, divided into shares of $100 each; and $400,000 in preferred stock, issued as a means of borrowing money. Whether any of the preferred stock was outstanding at the time of the transactions hereinafter referred to, does not appear; and, as such stock was not referred to in defendant’s propositions or argument, and as there was no suggestion of any mistake’s having been made in omitting its consideration from the court’s computation, it requires no further attention. Of the common stock, 355 shares had been issued to J. "W. Bettendorf, 2 shares to others, to qualify them to act as directors, and 643 shares to W. P. Bettendorf. The enterprise developed rapidly, under the masterful guidance of the decedent, and, at the • time of his death, the net value of the company’s property, after all deductions, exceeded $2,000,000.
"William P. Bettendorf was a man of inventive genius and marked constructive ability, a rare combination of qualifications for great enterprise. Throughout the growth of this company and development of the plant, he was the dominant and controlling spirit, even in matters of detail. He had begun life
“Transfer and set over to the party of the second part, and to its successors and assigns, the authority and license of applying and using the inventions and improvements described and claimed in any or all of said letters patent to the manufacture in the county of Scott, in the state of Iowa, and nowhere else, to the full end of the terms of said letters patent, respectively, of all kinds of wagons and wagon parts; also of all kinds of body and truck bolsters, car underframes, and car parts for railroad ears only, and to no other purpose; and of all of the aforesaid improvements in brake beams, and according to the designs as described and claimed in? said letters patent, respectively; and to sell the same in any foreign country so long as,
Nothing had been paid decedent under this agreement, though, according to the computation' of J. W. Bettendorf,$540,000 was owed him thereunder at the time of his death; while appellee contends that the royalties then amounted to $802,340.
Upon the petition of the plaintiff, J. W. Bettendorf was appointed administrator of the estate of decedent on June 8, 1910, and duly qualified. Though an inventory was filed, the appraisement was waived, at his instance, by the heirs of the estate. He was elected president of the company June 18, 191Ó, and, on July 9th, the widow and parents of the decedent entered into a contract with the company, by the terms of which the latter released a claim of about $122,000 which decedent had overdrawn on his salary and dividend account with the company, and the widow and parents relinquished all royalties mentioned. On the same day, the widow and parents transferred all letters patent held by decedent, and those applied for, to J. W. Bettendorf as trustee, with authority and obligation on his part to permanently license the company to make use thereof without exacting any compensation; and this he did immediately. These papers, of course, would not affect the relative proportions of the widow and parents in the patents and royalties; for the transfer enhanced the value of the stock in its entirety to the extent of the value of said patents and royalties, less the claim against decedent; but it resulted in increasing the value of the stock of J. W. Bettendorf to the extent of 355/1000 of such difference, for which he neither paid nor undertook to pay anything. In the latter part of May, 1911, he suggested to the plaintiff the purchase of her portion of the stock in the company; and, on June 1st, following, made a written proposal to pay therefor $431,252; and on June 7th of that year, she accepted this proposition, and on the same day, with the parents, in writing requested the defendant, as administrator of the estate, to make distribution of the shares and transfer the portion belonging to plaintiff, i. e., 321% shares, to her. On that day, the administrator so did, reserving the right, “if necessary or advisable, during the period of administration of said
The trial court found the plaintiff entitled to judgment for $471,929.86, recapitulating the items as follows:
“Par value common stock $100,000.00
Surplus at date of stock sale 2,422,285.35
Intangible value common stock 600,000.00
Gross value common stock $3,122,285.35
Deduct:
Account Shoal Creek investment 87,475.00
Net value common stock $3,084,810.35
Value plaintiff’s 321% shares 991,766.51
Deduct :
Sale price plaintiff’s stock $431,252
Amount paid Feb. 8, 1913, 50,000
One half of $122,000 overdraft 61,000
One half of $104,000 owed by estate 52,000
On value of house 68,000 662,252.00
329,514.51
Add benefit received by defendant’s 355 shares from plaintiff’s cancellation of royalties 142,415.35
$471,929.86”
(a) We have discovered in the record no reasonable justification of the release or waiver by plaintiff of her interest in the royalties owed by the' company to the estate, without exacting from the defendant the payment of one half of the relative portion thereof which his stock bore to all the stock. It may be that the discharge of this large indebtedness was desirable, and possibly essential to the welfare of the company; but, to accomplish this, it was not necessary that plaintiff should make any contribution to the defendant, either directly or indirectly. For all that appears, had fair compensation been exacted of defendant for the benefit derived by him from such release, neither the company’s interests nor prospects would have been affected or impaired thereby. The royalties so waived amounted to $802,340. One half of this claim belonged to the plaintiff, or $401,170; and this was turned over to the company by plaintiff without other compensation than the enhancement in value of the 321% shares of stock held by her. In other words, Bettendorf received 355/1000 of this amount gratuitously, and solely on the specious pretense that the gift was essential for the protection of the Bettendorf Axle Company. The defendant computed the amount owed for royalties at $540,000. The discrepancy in amounts arises from different constructions of the contract between decedent and the company with respect to- the payment of said royalties. Reverting to the excerpt therefrom above, it will be observed that it provides that, unless the net earnings from all departments exceeded enough to pay a dividend on the preferred stock of
The contention of the defendant is that the 35 per cent is to be computed on the remainder, after paying interest on the preferred stock, or the earnings of all departments; while plaintiff says that the computation was to be madepn the net earnings derived from the railway department alone, after said payment of interest. That the latter is the correct construction seems too plain for argument. The language hardly could have been plainer than was employed. The “net earnings” are those which accrue “exclusively” from the railway department, and there is no room for construing the language to mean the net earnings from all departments. The evident design was to award decedent’s remuneration on the more valuable patents, and eliminate deductions owing to loss in other departments, — and there were such losses almost continually in the wagon department. The defendant was hardly excusable in making the computation of royalties on the net surplus or profits of all departments, and representing to the plaintiff $540,000 as the sum total of all royalties for which the company was indebted to decedent. In fact, they amounted to $802,340, and she waived or released her interest in this sum over and above the $122,000 the decedent had overdrawn, which constituted a legitimate claim by the company against the estate. One half of' this difference, or $340,170, plaintiff waived or canceled, and thereby enhanced the value of defendant’s stock to the extent of 355/1000 of this amount. As said, the record affords no reasonable explanation of the gratuity to Joseph W. Bettendorf, then administrator of the deceased husband’s estate and president of the company. Counsel for defendant undertake to defend this on the grounds that none of the royalties had ever been collected, nor had they
It will be observed that the amount of these royalties was represented to be $262,340 less than it really was, and that she was given to understand that payment thereof would jeopardize the credit of the company; that its business was poor, and the outlook otherwise not promising; and that she relied upon these representations. The defendant admitted that, upon signing the agreement, she remarked, “We must save the company,” and further on, he was asked:
“Well, what did she say, when you first presented the mat-. ter to her, as to her judgment about canceling the royalties and the royalty contract; what was her first attitude when it was first explained to her? A. Why, she was perfectly satisfied, as I stated before. She said that, in her judgment, as I explained it, that was naturally the only thing that could be done. ’ ’
Even though decedent had expressed the intention of canceling his claim to the royalties owed him, he had never done
That the patents were of great value to the company cannot be questioned. They constituted the basis of the enterprise, and enabled the corporation, issuing only $100,000 in common stock, to develop an enterprise which, during the five years previous to 1911, yielded an average net annual income of $660,283.33; and in eight years, assets of over $2,500,000 in value had accumulated. The defendant, then administrator of the estate, derived practically one third of the value of these letters patent without any compensation whatever. Their value will be considered in connection with that of good will. At that time, defendant was administrator of the estate, as well as president of the corporation. As such administrator, he held the legal title to these claims, and occupied a fiduciary relation toward the plaintiff. The existence of such relation be
“Bettendorf, Iowa, June 1, 1911.
“Mrs. Elizabeth H. Bettendorf,
“City.
“My Dear Sister-in-law:
“Pursuant to our conversation in the matter of my purchasing your common stock interest in the Bettendorf Axle Company, I make the following statement and proposition:
“The surplus and common stock as of date of January 1, 1911, of the Bettendorf Axle Company being........................$2,381,570
Deductions account depreciation, etc........ 536,305
Net surplus and common stock............$1,845,265
Your equity in the above as owner of . 321% shares of stock being....................$ 593,252
Less % the amount the estate owes the Bettendorf Axle Company and which I will assume and agree to pay approximately.. 52,000
$ 541,252
Deductions account of patent suits, part of your portion of the contingent liability.. 110,000
Net amount I offer to pay.................$ 431,252
In cash. ................'..........$150,000
By Shaw Land & Timber Co. note 50,000
By Allen & Watkin’s note ........ 60,000
Bettendorf Axle Company preferred stock .......................... 18,000
By my notes for 1, 2 and 3 years at 5% per cent per annum, secured by common stock of Bettendorf Axle Company, 321% shares as collateral-153,252
$431,252
“Respectfully submitted,
.“ J. W. Bettendorf.”
"“Bettendorf, Iowa, June 1, 1911.
“I hereby accept the above proposition and agree to the terms thereof. Elizabeth H. Bettendorf.”
It will be observed that this offer was but $30,082 more than the royalties plaintiff had gratuitously assigned to the company, to say nothing of the value of the patents. But she accepted the offer, June 7th; and, on the same day, the widow and parents filed written application to the defendant, as administrator, requesting him to distribute the shares of stock to which they might be entitled, after exacting a written agreement that, if the administrator “should find it necessary or advisable during the period of administration of said estate to sell any of said stock for the purpose of paying debts against said estate or for any other purpose whatsoever, that he, or his successor as administrator, may have the right to have possession of said stock. The first parties will upon demand deliver said shares of stock to said J. W. Bettendorf or his successor as administrator, or to pay value thereof to him or his successor upon demand. ’ ’ And on the same day, the plaintiff transferred her 321% shares of the capital stock of the company to the defendant.
The' record satisfactorily discloses that the price paid by the defendant' was inadequate. The plaintiff was without information concerning the company’s affairs, was unaware of the extent of its property, or what it had been earning and had in prospects in the business world. The defendant was fully
On February 13, 1911, the directors, on motion of Yoss, had increased the salary of the defendant as president from $12,000 to $18,000 per annum. Surely, this was done in recognition of his ability and the services he was rendering, and bespoke the confidence not only of Yoss but of the other directors.
The defendant and others organized a corporation known as the Bettendorf Company, with capital stock of $7,500,000; and, on December 30, 1912, it, by its president, Joseph W. Bettendorf, filed application with the executive council for permission to issue capital stock in said sum, $5,000,000 in common stock and $2,500,000 in preferred, at 7 per cent cumulative, nonparticipative stock, representing that it had purchased the property, assets, and good will of tho Bettendorf Axle Company at the price of $7,500,000, to be represented by the par value of the stock hereinbefore mentioned; that the factory, shops, and machinery were appraised as of date, February 1, 1912, by the American Appraisal Company, together with its balance sheet at the close of business November 30, 1911, and included the following “classified statement of assets:”
“Foundry, shops, power plant, other buildings, including machinery and appliances (see Exhibit A) ....................$4,000,000.00
Real estate occupied by present plant, approximately 96 acres (see Exhibit B).. 192,000.00
Investments in bonds and stocks (see Exhibit D) ............................ 156,829.00
Patent development (see Exhibit E).... 61,902.00
Quick assets, consisting of material finished and in process of manufacture:
Cash, bills receivable, accounts receivable ...............$2,155,848.00
Less actual liabilities ...... 1,189,603.00
Net (see exhibit F) .................. 966,245.00
Total .............................$5,521,976.00
Patents, patent licenses and good will (see Exhibit G) ..............'...........$1,089,713.00
Value of $15,000,000.00 of orders booked for 1913 delivery (see Exhibit H).... 1,300,000.00
Total .............................$7,811,689.00”
The petitioners represented that “the officers are thoroughly familiar with all the property, assets, letters patent, and good will of the Bettendorf Axle Company, and that it is in their judgment and belief that the said property and good will are fully worth the valuation as hereinbefore shown.” This was sworn to by the defendant and Voss, saying that:
“We are familiar with the property, assets and business of the Bettendorf Axle Company of Davenport, Iowa; that we have each read the foregoing application of the Bettendorf •Company to the Executive Council; that we have knowledge of the value of assets, property, patents and good will as classified and set forth in the foregoing application and that the values thereof as shown in the foregoing application are true and correct to the best of our knowledge and belief.”
To this were attached certain schedules and estimates of values of the accepted property and good will.
From the evidence submitted, the executive council found the property to be of the value of $8,689,603, and that the out
The explanation sought to be made is that these values were exaggerated, in order to obtain acceptance of the property equivalent to cash in the organization of the company; and, of course, there is no established criterion for estimating values of property. Between the low and top values, even when fairly estimated, there may exist honest differences of relatively large amounts. But where the estimates of practically the same property, at periods scarcely more than eighteen months apart, vary as one to three, or, in other words, the property is sworn to be worth three times what it was earlier represented to be, without suggestion of any cause for the increase, the mere difference of opinion as to value, or swelling estimates thereof for a purpose, furnish no adequate explanation. It is inconceivable that reputable citizens, even though possessed of large means, would thus exaggerate values of property on oath, even though this were done to induce those in authority to authorize the acceptance of property as equivalent in value to cash, in payment for the
Reverting to defendant’s letter, it appears that he there represented the surplus and common stock, when that was written, to be $2,381,570; but, on July 11th following, Yoss, in his motion that a 300 per cent dividend be declared, represented, that the surplus alone was $2,422,285.35; and there is no pretense that this increased amount was due to additions made in the intervening 40 days. If to this is added the $100,000 par value of the common stock, the value of the property, as estimated by Yoss at this meeting of the directors at which the defendant presided, was $2,522,285.35, or $140,715.35 more than defendant had stated such value in his letter. The figures probably were furnished by defendant to the directors, of which Yoss was one, for defendant only was familiar with the books, and, in any event, the inference from his having accepted the dividend on this motion without protest warrants the conclusion that he approved the same. The discrepancy is nowhere explained satisfactorily. Again, in the letter, $536,305 is deducted on account of depreciation. The defendant testified that this was arbitrarily determined as the amount, and that he gave the figures making up this amount to Mr. Yoss. His examination on the subject is quite illuminating. It appears that the company had purchased 186 acres of land east of its foundry, up to Duck Creek, and an old stone crusher, for which it had paid $160,000. The defendant computed $80,000 as a part of the above deductions on account of this real estate. He admitted that it was. desirable to retain this land for the future development of the company, and his only explanation is that, as it was not required for immediate use, and was being leased at a low rental,- he thought it ought not to be computed at the value paid. Notwithstanding this, and although the property had not increased
It appears that, when the company purchased malleables, more than required for the particular job were bought, in order to meet emergencies of breakage and the like, and accounts thereof were carried in what was called surplus stock. After being carried for several years, they were put in the scrap heap, as new material came in. Deduction of $25,000 or $30,000 was made on this account, and without any investigation as to its .correctness.
$25,000 was deducted on account of what is known as the Shoal Creek Company investment, consisting, as we understand it, of about $60,000 in bonds and stocks. There is no basis for determining the measure of discount which might properly have been made. The Bettendorf Improvement Company had been organized to purchase lots and to build houses for the employees of the company, and to handle the property. $92,529 was the amount so invested in stock, being issued at the par value of $100 per share for that amount. The deduction on this account was made on the apparent theory that defendant would not know whether the company would ever get all its money back. $33,000 was charged off on account of the Sargent car, though it was listed in the application to the executive council, and transferred to the new company at the price of $54,2(^6.35, to which both the defendant and Voss testified, as being a, fair value. Otherwise, this item has no explanation.
Again, the company had been conducting “a, big test,” to demonstrate the “rigid versus the flexible truck.” Its competitors had undertaken by test to demonstrate that the company’s principle of truck construction was wrong, and this test was made to counteract the effect of that made by them; and it was expending or expecting to expend certain sums of money on account of these tests. Manifestly, all this was done to aid in the future disposition of the company’s output, and was not appropriate matter for deduction of $20,000 or $25,000. Other items were even more questionable. Indeed, defendant paid no
The statement of the financial condition of the company of June 30, 1910, has a deduction of $929,419.13 as “reserve for depreciation,” and it would seem to dispose of the items alluded to, especially that of the deduction “on account of the plant.” We do not animadvert on the necessity of taking into account depreciation in estimating the value of going concerns. Every well-conducted factory or manufacturing company should make provision to cover wasted property and losses through exhaustion or obsolescence. If book deductions are too great, this is of little concern to the shareholders. Though the effect is to reduce dividends, actual value is not impaired thereby, and the surplus is increased. The amounts of deductions charged off a company’s books, then, furnish little aid in ascertaining values. Depreciations other than those accepted by the trial court were without warrant, as must have been known to defendant, who was familiar with the books of the company.
The item of $52,000 was one half of the amount which had been withdrawn by decedent for the construction of his home, and was properly deducted. It will also be observed that $110,-000 was deducted on “account” of patent suits, “part of your portion of the contingent liability.” This item does great
In 1906 ......................$ 452,176.58
In 1907 ...................... 586,079.80
In 1908 ...................... 278,740.49
Jn 1909 ...................... 1,134,276.50
In 1910 ...................... 850,144.30
Dividing the total amount of the several sums by the number of years, we have the average annual income of $660,283.55.
After deducting 7 per cent on the average investment, there would remain over $500,000 of the average annual income to be capitalized. Of course, such a computation is not conclusive, for other circumstances may have bearing on the productivity of the corporation, and its salability. Thus it appears that th§re was local uncertainty as to the future of the company; but its dealings were not local, save with the banks. Its credit with them appears to have been unimpaired. As one of the witnesses expresses it, “the railroad world was at a low ebb,” early in 1911, but more of the company’s share of orders was obtained later-on. The business of furnishing supplies for railroads is shown to be subject to changing conditions of the companies, • and varies greatly from year to year. The year was concededly a bad one until after July, and this may have affected the outlook of the enterprise. All these matters should be taken into consideration in estimating- the value of the good will and
The record furnishes no basis for estimating the Value of the perpetual use of the patents, save the income earned in the plant; though defendant and Voss, in their representations to the executive council, fixed their value at $1,089,713. Of course, this was 18 months after the sale, and their value may have been greatly enhanced in the meantime by the receipt of large orders; or the statement might have been intended to mislead the executive council. Surely, the perpetual use must have been worth something. At any rate, there was every reason to believe, in June, 1911, that the company would continue in business and continue to earn a large income, not only on its tangible, but on its intangible property as well ;• and we are of the opinion that the valuation of the good will and perpetual use of the patents at $600,000 by the trial court was very moderate. But for the peculiar situation at the time, the depression in business and other matters referred to, we should be inclined to largely increase the amount. The majority are not inclined to do so, and for that reason, we shall not interfere with the finding of value as made by the trial judge.
III. During the period when the contracts concerning the royalties and patents were entered into, and the plaintiff’s por
‘ ‘ Our Code expressly recognizes that an executor or administrator is a representative of the estate, and stands in law on an equality with a trustee of an express trust. ’ ’
See, also, Lampman v. Lampman, 118 Iowa 140; 11 Am. & Eng. Encyc. of Law (2d Ed.) 986; Cole v. Stokes, 113 N. C. 270; Herriott v. Potter, 115 Iowa 648. An executor or administrator, in dealing with the estate and with those interested therein, is regarded as a trustee, and, as such, is subject to the principle which raises a presumption of fraud against him when he undertakes to purchase the trust property from his cestwi que trust. Counsel for defendant seek to avoid the application of this rule by saying that the widow’s portion of the stock had been distributed prior to its purchase by defendant. The record is to the contrary. All the negotiations occurred prior to June 7, 1911.
His written proposition to purchase was dated the first of that month, though Voss thought it was made earlier, and defendant fixed the date later. There is no dispute, however, that the acceptance was on the 7th; and, though the application of the widow and parents to the administrator for distribution, and his agreement thereto and the assignment of the stock, were dated on the same day, in the absence of any explanation, it may well be presumed that these occurred in the natural course of things, and therefore that the application for and distribution and the assignment of the stock took place subsequent to the negotiations. This is true, or else all these occurrences were part of the same transaction. In either event, defendant had not shaken off his trust relationship, prior to the purchase of the stock. Even were the proposition to purchase accepted after, but on the same day that the distribution occurred, the law would scrutinize with great care the transaction, in order to see to it that the cestui que trust had not been overreached. Tuche v. Buchholz, 43 Iowa 415.
“If the market or contract price of the stock should be different from the book value, he would be under no legal obligation to call especial attention to that fact; for the stockholder is entitled to examine the books, and this source of information, at least theoretically, is equally accessible to both.”
This does not mean that an officer of a corporation may take advantage of a stockholder whom he knows to be uninformed concerning the condition of the books, and who is without appreciation of what they will disclose, and who is relying upon his statement of such conditions, which is misleading in what it contains, as well as in its admissions. Such deception is quite as much to be condemned as that of withholding facts not appearing in the record; and, under the facts of this case, the doctrine as to the existence of the trust relation between officer and shareholder is quite as applicable as in the Dawson case. "Whether the defendant be held to the obligations of a trustee on the theory that the trust relation arose from his relation as administrator of the estate of the decedent, or from his position as director and president of the company, he owed to plaintiff the duty of dealing with her in absolute good faith. Because of relationship, the transactions reviewed are presumed to have been brought about by undue influence, and the burden was
“With respect to adequacy of consideration, no unbending rule applicable to all cases can, be framed, because there are classes of cases which have features which prevent the operation of a fixed rule. The leading text-writers speak of adequacy of consideration as essential. See 1 Perry on Trusts, Section 195; 2 Pomeroy’s Equity Jurisprudence, Section 958; 1 Story’s Equity Jurisprudence, Section 311. Compare, also, Grosvenor v. Sherratt, 28 Beavan 663; Edwards v. Meyrick, 2 Hare *70; Boyd v. Hawkins, 2 Dev. [N. C.] 329, 331; Coffee v. Ruffin, 4 Coldw. [Tenn.] 515; Rose v. Mynatt, 7 Yerg. [Tenn.] 30; Kisling v. Shaw, 33 Cal. 425; Rubidoex v. Parks, 48 Cal. 215. But this is too sweeping. For there may be cases in which no valuable consideration at all is necessary. Thus, while a gift from a cestui que trust to his trustee is exceedingly difficult to sustain (see Hatch v. Hatch, 9 Ves. 292), it will, in proper cases, be upheld. See Hunter v. Atkins, 3 Mylne & K. 113; Harris v. Tremenheere, 15 Ves. 34, 39; Marshall v. Stephens, 8 Humph. [Tenn.] 159. The principle upon which such cases rest is, that it was the intention of the cestui que trust to part with his property without consideration; and, if a court of equity can clearly
There was no evidence that, in making the deal, the plaintiff was aware that the price was inadequate. On the contrary, she was assured that it was all the stock was worth. There is no escape from the conclusion that the price was inadequate, and that the defendant omitted important matters from His statement, and included those that should not have been mentioned, and that plaintiff was induced thereby, without knowledge of the facts and the value of her stock, to part with it to defendant.
The record has not convinced us that Mr. Voss was in a situation to act as independent adviser with reference to the sale of the stock. He was not so disassociated from the interests of the trustees that he could well actn impartially, and solely in the interest of the cestui que trust. He was asked whether he had acted as “a sort of financial adviser of J. W. Bettendorf after the death of his brother, ’ ’ and answered in the affirmative. Nor does it appear that he had information other than that furnished by the trastee, on which to base his advice, save that coming to him as a creditor of the company, and as financial adviser of the defendant. Nor did he assume to base such advice as he gave on anything other than statements furnished by defendant, and the latter’s written proposition to the widow. These were made out in response to his request for statements as to the condition of the company. Doubtless he had ascertained other matters as director of the company, and as financial adviser of the decedent and subsequently of defendant, but only in a general way, as bankers usually keep in touch with the trend of a debtor’s business affairs. The record leaves no doubt that he made no personal investigation of the books or affairs or property of the company, but relied on the statements, including that contained in the written proposition, as did the plaintiff. Voss testified that, after some parley about arbitration, the plaintiff 'requested him to act for her in these negotiations; that he had many conversations with defendant, including some concerning deductions, and reported all of these to plaintiff, arranged with defendant that she should have the house, which was being constructed, for $65,000, instead of the $180,000
“I have been reasonably conversant with, the affairs of the company for years and having carefully gone over the statements made by J. W. B. in connection with his proposition and offer for your holdings made to you now, and fully recognize the uncertainties, fluctuations, and risks naturally attached to the business carried on and furthermore considering the fact that you are a minority stockholder, have no hesitation to recommend and advise you to accept his offer for the purchase of your interests. The price offered may be low and the deduction from book-values insisted upon by Mr. B. may be excessive, in fact, future results may and it is to be hoped will demonstrate that it might have been better for you not to have sold. On the other hand, the amount which you will realize is a large fortune, and properly and safely invested will yield a nice income. A sale surely relieves you of tremendous and continued risk and anxiety, and it is for this reason mainly, and the further reason that you yourself can hardly expect to have a voice in the future management of the company that I have advised you to accept the offer.”
On cross-examination, the plaintiff testified that she did not remember of ever having seen the original of this letter, until shown her at the trial. Even if she did, — and we are inclined to think it came into her hands, — it gave her no information as to the facts, and indicates that he possessed only figures fur
Voss has been the financial adviser and friend of W. P. Bettendorf, and, upon his death, became such adviser of the defendant. Upon the latter’s request, he succeeded decedent as a director of the company, and his first service in that capacity, apparently, was to advise the cancellation of its obligation to decedent’s estate for royalties owed it by the company, estimated by defendant at $540,000, but, in fact, amounting to over $800,000; and that it be relieved from the payment of royalties on patents thereafter. According to his testimony, the alleged intention of decedent to cancel the indebtedness for royalties was explained to plaintiff, and “she replied that she knew,” and that, concerning its effect on defendant’s interest, she remarked: “Well, poor Joe, upon whom the whole load, — he has got to bear the burden of the business and ought to have that little advantage,” — the small sum being $284,830.70, or á contribution by her of one half of this amount, or $142,415.35! Voss must have known that, whatever may have been the intention of decedent as to making such a gift, he had not done so, and that the'widow was under no obligation to carry it out; and that, whatever the explanation to her, she did not appreciate the amount owed, or the benefit being conferred on defendant. This was the first manifestation of the interest of Voss in the affairs of plaintiff! The second was in inducing her to part with all royalties on patents to be earned in the future, and perpetually part with their use. Talk of benefiting the credit of the company was well enough, but doing that did not necessitate contributing to.the wealth of defendant of hundreds of thousands of dollars. It would seem that, to a real friend of this widow’s, it would have occurred that fair compensation might have been exacted from defendant for a just proportion of royalties owed and to be earned in the future, in relieving the corporation of its burden of indebtedness.
Again, Voss knew that the letters patent had been assigned defendant and permanently licensed to the company, and were at the foundation of its great earning capacity; and yet he recommended the sale of the stock, without taking into consid
“Did you think, at the time you accepted this offer to purchase your stock, that the offer placed upon the stock in this letter was all the stock was worth, according to Mr. J. W. Bettendorf? A. Why, I placed confidence in him to give me the right figures. I had no reason to doubt him, and no reason to disbelieve him, because I knew nothing. Q. Did you have anyone go over the books of the company for you? A.- No, I did not. Q. Did you consult an attorney or anyone ? A. No, sir, I did not. Q. At any time, from the death of your husband down -until the time you signed this paper accepting his
Then follow the inquiries concerning the arrangement whereby she was to be released from the agreement under which she was to pay $180,000 for the house, and whereby she paid only $65,000 for it, and she testified that she did not think this was.conditional upon the purchase of the stock; that she then supposed that she was entitled to the house as widow of the decedent ; and that she accepted the figures that were put before her.
‘Q. For what did you accept them? A. For my right, what was coming to me for the right of the estate, and for the
This evidence as a whole indicates very satisfactorily that the plaintiff, in selling her stock, relied upon the representations and computations of the written proposition of defendant; and that throughout the transaction, she reposed quite as much, if not moré, confidence in the defendant than she did in Mr. Voss. The former had been the close associate of his brother during many years, and enjoyed his entire confidence; and it is manifest from this record that the plaintiff relied entirely upon his integrity, and believed that he did have due regard for her interest in all the transactions between them. She had parted with her share of the claim to the royalties because of her confidence in him; she had signed contracts which avoided any liability for the future use of the patents on the part of the company; and, when he spoke to her about purchasing her stcfck, nothing had occurred to impair this confidence. She accepted his statements as correct, and, in dealing with him, relied upon him to tell her what the stock was worth, quite as implicitly, if not more so, than she did on the advice of Voss. The defense that confidence reposed in defendant was superseded by reliance on independent advice, was not made out.
“Wherever a confirmation would itself be subject to the same objections and disabilities as the original act, a transaction cannot be confirmed and made binding; for confirmation assumes some positive, distinct action or language, which, taken together with the original transaction, amounts to a valid and binding agreement. * * * If the party originally possessing* the remedial right has obtained full knowledge of all the material facts involved in the transaction, has become fully aware of its imperfection and of his own rights to impeach it, or ought, and might, with reasonable diligence, have become so aware, and all undue influence is wholly removed, so that he can give a perfectly free consent, and he acts deliberately, and with the intention of ratifying the voidable transaction, then his confirmation is binding. * * * If, on the other hand, the original undue influence still remains, or if the act is simply a continuation of the former transaction, or if the party wrongly supposes that the original contract or transaction is binding, or if he has not full knowledge of all the material facts, and of his own rights, no act of confirmation, however formal, is effectual; the voidable nature of the transaction is unaltered.”
Defendant contends, however, that the facts, as cited above, were sufficient to put her on inquiry, and that, had she followed up such clues as she knew of, she must have ascertained all the facts bearing upon the value of the shares of stock sold, and that, for that reason, she failed to act with reasonable promptness in bringing her action to rescind the contract of settlement.
Mere suspicion is not alone sufficient to put a person on inquiry. Such feelings .as were excited in her were satisfied by Yoss in explaining that earnings had been added and the stock
The deduction of $110,000 on account of the patent suits had been talked of by Yoss, as both she and her son testified, previously to her reading the article in the local paper and her talk with Lane. Only this item was discussed, but undoubtedly she asserted, in substance, that she made no other claim; for she was then ignorant of any facts entitling her to -assert any, consequent on the indirection of the defendant in other respects. She was no better informed concerning the fraud practiced by not making full disclosure of all the facts, — as was exacted of defendant, both as administrator and president of the company, in buying the stock of her, — than at the time of the transaction. If her suspicions had been aroused, they had been pacified by Yoss; and we have discovered in the record no clue which can be said to be such as would have put an ordinarily prudent person on inquiry. As said, mere suspicion is not enough, and she had no more than this at the time of entering into the alleged settlement, and even that was fully pacified. In these circumstances, the plaintiff must be held not to have estopped herself, by entering into the contract, from claiming damages consequent on the fraud perpetrated on her as widow and stockholder. It was not until she met the lawyer who had prepared all the instruments relating to the patents in the fall of 1914 that she seems to have given any thought to the matter. As a result of this interview, Thomason, an attorney, was employed by her to investigate, and advise her as to whether she had any claim against the defendant. He did so, and reported, in the early part of 1915, that she had “a good lawsuit;” and this action was begun in May following.
The Bettendorf Axle Company had transferred all its stock to the Bettendorf Company, newly organized in 1913, and the stock had been issued on February 23d of that year. No one could well pretend that she, as a person of ordinary diligence, must have asserted the facts prior to that time; and between that time and the beginning of the action the defendant’s situation does not appear to have been changed, and such delay as there was, was not inimical to his interest. It may be that plaintiff was not fully advised, even at the time of beginning the
‘ ‘ Though, in general, one may not affirm in part and rescind in part, the rule is equitable, and ceases to operate where equity requires it to do so, as indicated in Gay v. D. M. Osborne & Co., 102 Wis. 641 (78 N. W. 1079), Ludington v. Patton, and other cases. One must distinguish between situations where equity requires the rule to apply, and where it requires an exception; and also' between an action for rescission and one based on re-" scission; also, between an action for rescission and an action to prevent injury where rescission would not furnish an adequate
' ‘ ‘ The right of rescission of a contract for fraud, though a legal right, is based on equitable principles. Therefore, the requisites of its exercise should go no further than strict compliance which the dictates of good conscience requires. For that reason, the exception to the rule of total rescission indicated has become a part of our jurisprudence.’
“A proper conception of the real ethics of the law will enable, one to perceive that rules are based on principles of justice and are limited by the effects in that regard. Therefore, when it is said that application of a rule to a particular situation would work injustice instead of justice, especially where the controversy is being dealt with in equity, wisdom will lead one to search for some recognized exception to fit the case, and, if none of the particular character can be found illustrated, to classify the circumstances within the broad principles'that rules based on supposed necessities of justice are not to be applied beyond their reasonable scope.”
A like question was raised in Ormsby v. Budd, 72 Iowa 80, where the court says:
“Defendants insist that, as plaintiff fails to tender, or offer to pay, in his petition, these several sums, thus putting defendants in statu quo, he is not entitled to any relief. Upon this point, it is sufficient to say that defendants do not set up in their answer the failure to tender these sums as a defense.”
And further on:
“Defendants also insist that plaintiff’s offer to retransfer the stock is not sufficient. But no objection of this kind was raised by. the pleadings, or urged in the court below, so far as we are able to discover. Plaintiff, in his petition, does not offer to make the transfer of the stock. We discover no prejudice which can result to defendant, if plaintiff file with the clerk of the court proper assignments of the stock certificates, before the reconveyance to him of the lands is made by defendants, or before the deeds to defendants are canceled. The decree should so provide. ’ ’
The point is touched upon in Schneider v. Schneider, 125 Iowa 1, where the contention was that a tender in open court alone was not sufficient. The court held otherwise, saying that:
“In equity, a willingness and readiness to do an act is all that is required; and, if the plaintiff be otherwise entitled to relief, the court will not deny it simply because no profert in evidence has been made of the subject of the tender, but will, by its decree, if it be deemed necessary for defendant’s protection, require the act to be done before the relief becomes effective. ’ ’
See, also, Clapp v. Greenlee, 100 Iowa 586. The doctrine is that, in case of a contract’s voidability upon the ground of fraud, the injured party must totally rescind it, and restore to
“If the complaint had not been so framed as to show such willingness, the defect could only have been reached by a demurrer for insufficiency on the particular ground that a cause of action in equity was not stated for the reason that plaintiff failed to show a willingness to do equity. Taylor v. Fulks’ Admr., (Ky.) 29 S. W. 349; Ormsby v. Budd, 72 Iowa 80; and Newman v. Smith, 77 Cal. 22.”
The record leaves no doubt that the preferred stock was
Dissenting Opinion
(dissenting). Like the majority, I find it conducive to clarity to deal separately with the several claims of the plaintiff.
In pleading false representations and scienter, plaintiff has assumed an unnecessary burden. A fiduciary relation existed between her and the defendant at the time he bought her stock, and therefore the burden is on him to show that he dealt fairly with plaintiff, and neither misrepresented any material fact nor failed in any duty to make full and fair disclosure.
The representations and failure to make disclosure charged in connection with the purchase of the stock are three: (a) The writing of an offer to purchase the stock; (b) deductions demanded on account of depreciation and other matters; (c) representations charged to have been made as to the condition of the corporation at and immediately before the time the stock was purchased. • «
There is further complaint that defendant dealt unfairly with the plaintiff in connection with the transfer of patents owned by the late husband of plaintiff, and in obtaining release from royalties due.
The reasons that impel me to make emphatic protest against the conclusions reached by the majority, I shall state first by way of propositions. Some of these will need no elaboration, and be self-proving. Others will be followed up by such amplification as will present the reasons for stating the proposition.
I. A naked offer to purchase at a stated price, with declaration that no more will be paid, which offer is made after values are fixed by an agent of the seller’s own selections, is neither an actionable representation nor a breach of duty to make disclosure.
III. A statement by the agent of the seller, after the sale is concluded, that the property is worth more then than the seller paid for it, is, in the first place, not binding on the defendant, because not made by his agent, and can, at any rate, add nothing to the written offer, nor put a representation into it that is not found in it.
IV. The fact that one who is not the agent of the defendant declared, some 40 days after defendant offered to buy, that the property, when bought, was worth substantially more than at the earlier time, does not prove against defendant, if it be evidence at all, what the value was at the earlier time.
V. That a buyer, some 18 months after buying stock, -states to the executive council that the property is worth much more than he said it was worth at the time he bought it, 18 months earlier, is no evidence of what it was worth at the earlier time, — especially where it is explained that the enlarged value was fictitious, in order to obtain favorable action from the council.
VI. An alleged representation as to the condition of the corporation in which plaintiff sold stock is not proved to have been made. If made, it appears affirmatively that it was true.
a. The majority concedes that said representation was true when made, but holds the defendant responsible as for a false representation or failure to disclose, because unanticipated conditions made the business better in future than it was at the time when defendant purchased the stock.
b. There is no liability for false representations or breach of duty to make disclosures, merely because a buyer of stock is not a prophet.
VII. Since Voss was the agent of plaintiff’s own selection, and conducted all the negotiations, his knowledge is the knowledge of plaintiff. And as there is no claim that he himself was overreached, and as the evidence shows he himself
VIII. Where one refuses to deal, or to fix values for property, except by having an agent of the seller’s own choosing fix the valuation, it cannot be said that she relied upon a fiduciary relation, existing between the seller and the proposed buyer. The very choosing of such agent is a refusal to rely on the fiduciary relation.
IX. For, whatever it comes to, the majority is mistaken in saying that plaintiff relied as much, if not more, on defendant than on the advice of Voss.
a. Assuming that Voss is not a competent, impartial, and independent adviser, and it takes certain defenses away from defendant. But it does not take away the right to say that one who refused to fix valuations and appointed an agent to fix them therefore relied on the agent, and not on1 the buyer. There was no reliance on the alleged representation as to the condition of the business, because plaintiff testified that the same did not influence her “any.”
X. Whether an agent fall within the independent adviser rule or not, one who buys through him from his principal is not responsible for any negligence or misconduct on the part of such agent. The majority deals with this case as though it were a suit against Voss for having broken his duty as an agent. It is not such suit, and nowhere, except in the majority opinion, is the competency or good faith of Voss challenged. At no point is it claimed that he and defendant were in collusion.
XI. Plaintiff had reasons of her own that induced her to sell, and retire from the corporation; therefore, she did not rely on defendant, or on the fiduciary relation between them.
XII. No inadequacy is shown, because the property sold was highly speculative. As to such property, adequacy is determined by what it could have been sold for to others for cash.
XIII. There was no inadequacy, because the only wrong
XIV. Where one believes he has been defrauded in making a sale, and seeks to employ counsel, refrains from proceeding to follow up the knowledge and belief, and to ascertain how much injury has been done by the alleged fraud, and accepts a substantial sum for a release, such settlement is binding though it was made in ignorance of how injurious the fraud had been. If it were otherwise, the statute of limitations would never begin to run until the wronged party had seen fit to ascertain finally the extent of his injury.
XV. There was no fiduciary relation when the settlement was made.
XVI. The settlement included all claims, and not merely the one item of $110,000, deducted for possible patent litigation.
XVII. This is not a case of mere suspicion that does not put on inquiry, but is an accepting money after being told to •assert all claims once for all, and after believing that plaintiff had been overreached. It is not a ease of mere suspicion, but of deliberate refusal to proceed to the end with knowledge obtained, taking the money of the other party, and then claiming more, because plaintiff concluded later to ascertain what she could as well have ascertained before consenting to settle.
XVIII. This is not a case of laches in delaying suit. It is a case .where the suit, no matter how timely brought, cannot be maintained, because, with means of knowledge at hand, and in the belief that she had been wronged, plaintiff released all damages, for a substantial consideration. It is not a case of delaying suit, but of trying to collect damages in piecemeal, and for an additional payment every time the claimant sees fit to make further investigation and claim more on the alleged discovery of more damage.
XIX.Granting there may be cases in other jurisdictions that held otherwise, in my opinion it is settled by Allen v. Pe
XX. Releasing royalty claims due the late W. P. Bettendorf worked no fraud on the plaintiff; and the release was, at all events, wholly at the instance of Voss, without interference by defendant; and Voss was never the agent of defendant; and the advice given was sound.
I shall now proceed to such amplification as I deem demanded.
1. Defendant had no negotiations with plaintiff, except to inquire of her whether she cared to sell her stock. To carry on the negotiations, and to ascertain values, plaintiff, of her own volition, selected Voss. No attack is made either on his integrity, diligence, or competency, except such as is made in the majority opinion. And let me say, in passing, that the trial judge, who is a member of the community in which Mr. Voss has made his enviable standing in life, makes a finding that Mr. Voss is a man of unimpeachable integrity. Be all that as it may, there is no warrant for dealing with this suit as though it were brought against Voss, asserting misconduct, or brought against Voss and defendant, asserting collusion. There is no such suit, and, as said, there is no such claim, so far as the record is. concerned.
After Voss was made agent, he did negotiate; he did reach a conclusion as to values; and finally, the defendant wrote a proposal to buy, which makes reference to the former conversation, in which inquiry had been made of plaintiff - as to her willingness to sell, and in which she had expressed a willingness. Aside from this reference, the letter was this:
“I make the following statement and proposition:
.The surplus and common stock, as of date of January 1, 1911, of the Bettendorf Axle Company, being .......................$2,381,570
Deductions account depreciation, etc....... 536,305
Net surplus and common stock............$1,845,265
Less y2 the amount the estate owes the Bettendorf Axle Company and which I will assume and agree to pay, approximately.... 52,000
$ 541,252
Deductions account of patent suits, part of your portion of the contingent liability.. 110,000
Net amount I offer to pay ..............$ 431,252
* ‘ I propose to pay you as follows:
In cash ........................$150,000
By Shaw Land & Timber Company note.......................... 50,000
By Allen & Watkins note........ 60,000”
This letter is merely an enumeration of what the offerant is considering in making the offer, plus true statements of what was on hand in the way of capital stock and surplus, plus the steps in computation, and its close is the statement, “net amount I offer to pay.” It should not be said to be either a representation or a breach of duty to make disclosure, and the plaintiff herself pleads that the letter in question was merely a declaration that the price named in the written proposal was the largest price that defendant would pay.
No matter how reasonable or unreasonable such an offer is, it is nothing actionable to make it.
The receipt of the Yoss letter is not denied by the plaintiff, but by her attorney, and the majority is mistaken in treating the receipt as denied, and so the presumption of due delivery overcome. All the plaintiff does is to say she has no recollection of having received this letter. (Abstract 1012.)
Though the written offer does not mention good will, neither does it mention that the corporation had a manufacturing plant. And when Yoss, the agent of plaintiff, advised her to accept the offer, he knew that good will was not mentioned in said letter, and what the true values were.
Whether Yoss was or was not within the rule governing in
“The price offered may be low and the deductions from book value insisted upon by Mr. B. may be excessive, in fact future results may, and it is to be hoped will, demonstrate that it might have been better for you not to have sold.”
Having been advised that the offer was too low, and that the deductions were excessive (although it happens to be the fact that the charge off made in the lifetime of plaintiff’s husband was larger), no relief may be had because the offer was unjustifiably inadequate. Colton v. Stanford, 82 Cal. 351 (23 Pac. 16, at 20).
As to the $110,000 for the item of possible patent litigation expense, it is but necessary to say that this item was an arbitrary demand for deduction, made in the offer to buy.
The fact that, 11 days after the date of the written offer, Voss declared, at a meeting of the board of directors, that the surplus and common stock were worth $140,715.35 more than the figures found in the written offer, is an immaterial fact: First, because nothing said by Voss after the letter was written can add a word to that letter, or put a representation into it that is not there; second, Voss, being the agent of plaintiff, and not of defendant, cannot bind the defendant with this or any other statement.
It is immaterial that Voss, 41 days after defendant made his offer, and 34 days after his acceptance, offered a resolution at a directors’ meeting, presided over by defendant, wherein he asserted that a large surplus had been accumulated, and that, therefore, a large dividend should be declared. If Voss misconducted himself in advising plaintiff, the remedy lies in a suit against him, or one against him and defendant; and plaintiff does not charge Voss with any wrongdoing, nor claim that he acted in collusion with defendant. Second, as to this assertion by Voss, it must be repeated that he was never the agent of defendant.
To hold that the application to the executive council involved-no padding is proving too much. If the majority rejects the explanation of defendant, then it is confronted with being compelled to hold that, 18 months earlier, the property was worth substantially what the council found it to be. It found it to be of the value of $8,689,603. It deducted indebtedness which the new company had assumed, in $1,108,603, and then authorized issuance of stock to the amount of $7,500,000. Is it possible that what was valued at a little over $2,000,000 at the time the stock was sold was, instead, worth $8,000,000? So to hold, overlooks that other statement of the majority opinion that, ■when Voss moved the declaration of a dividend, only 41 days after the offer was made by defendant, the enhancement then was but $140,715.35.
It seems fairly plain that the verification of the application made to the council, while it weakens the credibility of defendant, if there- were need to make a test, is no evidence whatever that, even if he had not dealt with the agent rather than the plaintiff, he did anything actionable when he bought.
' 2. Under the rule of Birks v. McNeill, 185 Iowa 1123, the plaintiff should not be allowed to recover anything, because she dealt through, an agent who had full information, or the means of getting it, as to the value of the property sold. This case the opinion does not as much as mention. The headnote (in the Northwestern Reporter) in the case is:
“Where plaintiff made an officer of the corporation in which she owned stock her attorney in fact, held that the president of the corporation, though he was the brother of plaintiff’s husband and the executor of his will, was under no duty to explain to plaintiff the value of the stock before purchasing it on a proposal submitted by her attorney in fact.”
It appeared that the attorney in fact had been a director in the corporation, and had, at one time, been secretary and mana
“The books were open to his inspection quite as freely as to the president of the corporation. * * * He either knew or had quite as good an opportunity for ascertaining the value of these several properties as did the president. * * * We are not saying that he actually knew what the several properties were worth. * * * We are inclined to the view that she is in no better situation and cannot be heard to complain of the omission of McNeill to advise her agent concerning the condition of the company.”
Dawson v. National Life Ins. Co., 176 Iowa 362, now relied on by the majority, was urged in the Birks case, but that did not seem to affect the result reached.
This case is fairly within the holding of the Birks case. Though the opinion, in a way, challenges the fact, the record demonstrates overwhelmingly that Voss had as much knowledge, or means of obtaining knowledge, as had the agent in the Birks case. Beyond question, Voss had full knowledge of what the condition and assets of the corporation were, and what the stock was worth; and he knew what the offer omitted in, say, stating good will. If he and his knowledge bind plaintiff, there is no breach of duty to make disclosure. The disclosure was due the agent alone, and the principal can gain nothing on the ground that there was a failure to disclose to the agent what he already knew. Voss got his knowledge first through the late husband of the plaintiff, and from statements made by the decedent. He got further knowledge because his bank was financing the corporation, and he had to investigate its standing constantly, and compare its development and success with that of other like institutions, in order to determine what credit should be extended, and he obtained knowledge by becoming a director, attending meetings of the board. He sums it all up that his knowledge “became practically full and complete.”
What would have to be said if there were claim or evidence that defendant overreached Yoss, or that the two were in collusion, is not important, where there is no such plea and no such evidence. In their absence, the cestui is bound by the knowledge of her agent; and as to him, there was no duty to make disclosures, because, following the Birks case, he already knew everything that defendant would have been able to disclose to him. See Korn v. Becker, 40 N. J. Eq. 408 (4 Atl. 434); Bigelow on Fraud, 263, 264; Moxon v. Payne, L. R. 8 Ch. 881.
3. It is charged that defendant fraudulently (Paragraph 33) represented that the affairs of the company were in poor condition, and its business unprofitable; and that he grossly misrepresented the condition of the company at all times subsequent to the death of plaintiff’s husband, and up to May 25, 1911. (Paragraph 20.) The plaintiff herself does not support this in her testimony, and defendant denied it, while a witness for plaintiff. She vouched for his credibility by making him a witness, and there is much to impeach her' credibility. I have already pointed out how she conflicts on what time she first thought she had been wronged.
Be all that as it may, the alleged representation was true. Defendant, as a witness for plaintiff, testified, without contradiction, that, at the time the stock was sold to him, and in all the early part of 1911, the market for railroad cars was poor and very stagnant; that, from then to June 7, 1911, the date of the purchase, the volume of business in the territory from which orders might be anticipated was constantly decreasing; and that, from all indications, he, at the time he bought, “honestly believed that the business would show a loss for the year 1911.” It appears that, while the last seven months of 1910 yielded $850,144.30 in net earnings, the first five months of 191Í yielded but $149,366.67. The majority .opinion itself discloses that the statement made was true, for it is said the business had not been good during the early part of 1911, as compared with the previous year, and that the company, during the first five
The way the majority avoids this situation is by injecting prophecy into scienter, by holding that, though the statement as to business conditions was true when made, it was actionable because the defendant ought to have taken a rosier view of future possibilities of improvement, — was actionable if, later, through unanticipated events, it transpired that the view of the offerant was more gloomy than the future justified. Yoss said, without contradiction, that the subsequent enhancement was due to great and unexpected profits, to wit, the receipt of $15,000,-000 in war orders, after the sale of the stock. (Abstract 909.) Defendant, as a witness for plaintiff, testified to the effect that the betterment evidenced by the recapitalization was due to orders which neither party knew of or anticipated when the stock was bought. (Abstract 147 et seq.)
Great profits accruing from the unanticipated world’s war cannot be considered on whether the price paid without such anticipation is adequate. Colton v. Stanford, 82 Cal. 351 (23 Pac. 16, 29, 32). It may not be availed of that a gloomy outlook was unjustified, because later there was an active boom in the railroad business; because there came a most unprecedented demand for railroad securities, “owing to which the defendants found themselves in a most prosperous condition.” Colton v. Stanford, 82 Cal. 351 (23 Pac. 16, at 29). To like effect is Nicholson v. Janeway, 16 N. J. Eq. 285; Murray v. Elston, 24 N. J. Eq. 310; Twin Lick Oil Co. v. Marbury, 91 U. S. 587; Kitchen v. St. Louis, K. C. & N. R. Co., 69 Mo. 224.
There can be no question that, in the opinion of the major
“But, while it appears there was local uncertainty of the future of the company, it had no local dealings except with the banks, and there its credit seems to have been unimpaired. There seems to have been no occasion for pessimism as to the future of this company, though some local capitalists of ripe judgment seem to have shaken their heads.”
Again:
“If the business during 1911 was not good, this was due to a temporary situation, i. e., the fact that the railway companies were not purchasing' cars and. other materials in any considerable quantities, owing to attempts to reduce the rates fixed by the Interstate Commerce Commission. But this paved the way for larger orders in the future, and furnished no grounds for expectation of permanent cessation in the output of cars, as subsequently appeared. For all that appears the company would be unable to obtain and take care of its share of business in the future. Surely, there was every reason to believe that, in the future development of this enterprise, a fair income would , be realized on the tangible property of the company.”
Could there well be a balder pronouncement that, if a trustee truthfully states existing conditions, he will still be liable because he refuses to indulge in a sufficiently hopeful view of the future? The ultimate deduction of the court is that, because of an omission to deal on the basis of a true outlook on the future, the defendant failed in a duty “to truthfully and fully disclose the financial condition of the company,” and that his failure to be an optimist resulted in his obtaining the stock for at least $560,000 less than the future proved its value to be.
If failure to be sufficiently optimistic makes the buyer liable, why should not the seller be liable if the view taken was too rosy, and it turns out, in future, that the price paid was too high?
What has been said as to the knowledge which Voss had is equally applicable at this point. He was informed, and was not deceived as to the condition of the business.
“I knew Mr. Voss was a gentleman whom I could,talk with, and I needed someone to talk with. I know that I used Mr. Voss as a personal friend to talk matters with. Q. If you knew that Mr. Voss was director, would you regard him as a person who would look after it, and upon whom you relied to look after your interest? A. From a decidedly friendly standpoint. I supposed Mr. Voss was the only man whom I could talk with. ’1
As said, every line of what is relevant in the testimony quoted in the opinion, instead of showing that there was more reliance on defendant than on Voss, shows that the sole reliance was on Voss. Add to this the fact that, when the parties thought of having a set of arbitrators, she selected Voss, and when they concluded that no set of arbitrators was needed, she made Voss her agent, to represent her.
It is absolutely established that something other than the relationship to defendant induced the sale, and that the plaintiff had no confidence in defendant. (Abstract 167, 168, 203, 225, 237, 810, 811, 812.) Plaintiff admits she knew the future was problematical, because the defendant was not the genius that her late husband had been. (Abstract 197, 198.) And Voss testified, without dispute, that plaintiff “had not any too much confidence in J. W. Bettendorf and in the continuance of the business, and knew the ups and downs of it.” Plaintiff testifies, “I wanted to get free from the business.” (Abstract 196, 197.) When asked what she thought the defendant meant by his inquiry if she had ever thought of selling her stock, she
Be all that as it may, one who declines to deal with the fiduciary, but insists upon having the dealing done through an agent of her selection, and that the valuation be settled by him, cannot claim that she relied upon the fiduciary relation. Such conduct is a conclusive negation of such reliance. This is so though the agent does not fall within the independent adviser rule. The fact of insisting upon such an agent as the intermediary is precisely as conclusive against the claim of reliance as though an impartial, competent, independent adviser had been selected. The only difference is that, as against the honest adviser, there could be no claim, no matter how much he erred in judgment; while, as to the mere agent, if he was negligent or incompetent, or misconducted himself, there would be a remedy against him or any who colluded with him.
If the party to whom the representations were made, himself resort to means of verification, before entering into the contract, it is made to appear that he relied on his own investigations, and not on the representations. No claim of reliance on the relationship can in reason be made, where the complainant has undertaken to investigate for himself, called in experts, and acted upon his own judgment and the advice of friends. Kerr on Fraud & Mistake, 75 to 78. The burden to make full disclosure ceases to exist where the beneficiary acts exclusively on the advice of the professional friends selected to investigate and counsel, and selected “because of their ability and their knowledge of affairs of the trustees with whom he is dealing.” Colton v. Stanford, 82 Cal. 351 (23 Pac. 16, at 22); Blanc v. Connor, 167 Cal. 719 (141 Pac. 217, at 220).
That one may not employ an agent to act for her, and then claim reliance upon the relation to the fiduciary, is true even between trustee and cestui. Hoyt v. Latham, 143 U. S. 553; Ashcom v. Smith, 2 P. & W. (Pa.) 211. The cestui may not give notice in advance that he should rely upon the investiga
“You owe me reparation; your representations were incorrect. It was your' duty to make them full, fair, and accurate. I claim a rescission upon the representations you made, although I did not deal with you.”
See Colton v. Stanford, 82 Cal. 351 (23 Pac. 16, at 21).
5. There was no inadequacy, because plaintiff claims nothing except that she was defrauded as to her ‘ ‘ common stock. ’ ’ It is conceded that the capitalization was one share common and four shares preferred stock. The court finds inadequacy on the theory that the shares of common stock sold transferred roughly a third interest in the property. But this is true only if there were no preferred stock, as aforesaid. Once show that there was such preferred stock, and make no showing that it has been retired or transferred by plaintiff to defendant, and it becomes plain that, instead of selling one third of the property, the common stock sold transferred but one fifteenth of that property. Manifestly, What may be inadequate if paid for a third can hardly be said to be inadequate when paid for a fifteenth. The preferred stock conveys as much of the corporate assets as the common. 1 Cook on Corporations (7th Ed.), Section 278; Birch v. Cropper, 14 App. Cas. 525 (1889).
The preferred stock should be considered, though appellant did not, in terms, urge, either in propositions or in argument, that the existence of that stock destroyed the claim of inadequacy. Appellant does raise that there was inadequacy. The record shows, without conflict, that nothing but common stock was sold, and that nothing but being overreached in the sale of common stock is complained of. The record shows, without dispute, that the preferred stock once existed, and it is presumed that this situation continued to exist. It appears without dispute that for one share of common stock there were four shares of preferred. This situation demands considering whether the existence of the preferred stock does not destroy all claim of inadequacy. It was not necessary to say as much in so many words. Argument in extenso is not necessary, to obtain appellate review.
I confess that our treatment of our rules is not easy for me to understand. In this one instance, we adhere to them. In case after case where there is no attempt at rule presentation, we ignore that fact. Be that as it may, in my opinion inadequacy is properly presented.
The allowance of $142,415.35 for alleged enhancement of the assets of defendant by release of the claims for royalties is, at any rate, four fifths too large, because here, too, the existence of preferred stock is overlooked.
The opinion itself points out how fluctuating and uncertain the operations of such a corporation as this are. Where the property is uncertain, speculative, or dependent upon uncertain or fluctuating conditions, the test of value is not in what the party might have made out of it had he retained it, “but what it could have been sold for outright” (Cardoner v. Day, 253 Fed. 572, at 584; Appeal of Geddes, 80 Pa. 442, 462; Colton v. Stanford, 82 Cal. 351 [23 Pac. 16, 19]); and there is no evidence that anyone would have paid more.
6. Plaintiff effected a settlement with defendant, and solemnly released him in full, by duly executed writing. She obtained $50,000 thereby. She retains it, and has not tendered it. The majority permits her to avoid this settlement and to obtain a half million dollars more, despite that settlement. The law on what will impeach a settlement is, as will presently be shown, perfectly plain.
On what facts is this accord and satisfaction nullified? Plaintiff testifies she first learned that there was something wrong with the sale ‘ ‘ at the time when I read the notice in the papers; ’ ’ read that there had been a recapitalization in $7,500,000. (Abstract 177.) This was in December, 1913. The train of suspicion was fired then. She was asked whether she was not of
“Because I didn’t think I was fairly treated, after I read the magnitude of that — that figure looked enormous — that $7,500,000.” (Abstract 201.) And: “When I saw this article in the paper about this $7,500,000 corporation, I immediately thought there was something wrong about my selling out and only getting a half a million dollars.”
To be sure, she also testified that she had not as much as a suspicion until long after she read that article, and that the first time she came to the conclusion she had been wronged was in the spring of 1914. Next, that not until she talked with her new attorney, Mr. Thomason, in the fall of 1914, did she learn in any way or believe there had been anything wrong with any of the transactions. This pushes the beginning of even suspicion from December, 1913, up to the fall of 1914. The final edition is that this time “was the first time that I suspected that there had been anything wrong with any of those proceedings.” (Abstract 178.)
Go back to her first statement, and we find that, when she read the newspaper article, about December 30, 1913, this happened: She acted as soon as she read the newspaper article, because she thereby became convinced that she had been overreached, and that she ought to ascertain the exact extent of her injury. She went to get satisfaction from someone (Abstract 237), some good lawyer, who, in her opinion, “would manage the matter.” She wanted to get “the best that could be had at any price.” It seemed to her she had to talk with someone, when she read this article (Abstract 172), and thereupon she attempted to see Mr. Lane for the purpose of retaining him “as my attorney to represent my interest to look into the matter of where that enormous amount of money had come from in so short a time, and to do that on my behalf” (Abstract 230, 239), to investigate the matter for her, to investigate “where that amount of money came from in such a short time” (Abstract 209). Before she settled, she learned that the litigation for
Surely, she went into settlement in full belief that she had been wronged by the transaction of selling, as a whole. All that she did not know then and claims to know now is the extent of the injury she had suffered by selling. The settlement was not limited, as the majority suggests, to the $110,000 item originally deducted for possible patent litigation. This is so, first, because plaintiff, at this time, was asserting that she had been wronged,' not by this deduction, but by the sale in its entirety; second, because, as the opinion concedes, the attorney for defendant “insisted that, if she had any other claims, she must assert them at that time, so that everything could be finally settled;” third, the instrument signed by plaintiff “ratified and confirmed the certain sale of common stock” she had made to defendant (not only the having had $110,000 deducted for patent litigation).
There was no fiduciary relation when the settlement was had. She no longer sustained such relation to defendant, and she did not then trust him, and professes to have then believed that he wronged her. By clear inference, she declares that, as soon as she read this newspaper article, she became distrustful of the defendant; for she says that, until she read that article, “nothing had occurred to make me distrust Mr. Bettendorf.”
No one deceived her as to the extent of her injury, and she dealt with the lawyer of the man whom she was accusing of breach of trust and worse. He did not deceive her, and made clear that she was dealing at arm’s length. True, it is argued that this lawyer overreached plaintiff; that she was once more defrauded; that no full explanation was made to her of the papers she was signing to effectuate the settlement; and that she was not fully advised as to their legal effect. I shall spend little time with this absurd claim of fraud, resting upon faith in the representations of an attorney for an opponent, as to whom she believed that he had defrauded her.
She was not lulled by anything Voss said to her, because she persisted in remaining desperate, and in obtaining counsel who would get her her rights. There is nothing to the assertion of the majority that, somehow or other, Voss satisfied her, after
The majority brushes aside this solemn settlement, made on large consideration, and permits a recovery of half a million dollars in addition, on two.grounds. The first is the utterly irrelevant one that plaintiff was not too slow in beginning her suit. The question is not whether her suit was timely, but whether, though timely, she has any right to maintain it.
The second ground is that she had nothing to go on beyond a mere suspicion, and, therefore, was not put to inquiry. This simply overlooks that plaintiff settled when she fully believed she had been wronged in the purchase of the stock, and had not obtained enough money, and when she had the clué that the $2,000,000 corporation in which she sold stock had all at once become a $7,500,000 corporation; settled' when she was assert- • ing that she “did not know where all this money came from;” settled while she complained that she had been paid “but a half million dollars.”
Here is no case of mere suspicion that a wrong had been perpetrated. Instead, it is a naked case of failure to ascertain the extent of injury from a wrong believed to have been committed, and the general nature of which was fully realized, and settling before making any attempt to ascertain the extent of the injury suffered. It is hornbook law that, where one believes he has been defrauded, the fact that he makes a settlement in ignorance of the extent of his injury will not avoid the settlement (Barnes v. Century Sav. Bank, 165 Iowa 141, 176), and is not fully informed as to his legal rights. And this is true even as to a cestui. In Re Hoffman’s Estate, 183 Mich. 67 (152 N. W. 952); 2 Pomeroy on Equity Jurisprudence (3d Ed.) See. 964. He can
The means of obtaining knowledge makes the case equivalent to having knowledge. Norris v. Haggin, 28 Fed. 275, 280, approved in Barnes v. Century Sav. Bank, 165 Iowa 141; Hinkley v. Sac Oil & P. L. Co., 132 Iowa 396, 409; German Sav. Bank v. Des Moines Nat. Bank, 122 Iowa 737, 744. A “clue which, if followed up, would lead to discovery is, in law, equivalent to a discovery — equivalent to knowledge.” Norris v. Haggin, 28 Fed. 275, 280, quoted and approved in Barnes v. Century Sav. Bank, 165 Iowa 141; Hinkley v. Sac Oil & P. L. Co., 132 Iowa 396, 409; German Sav. Bank v. Des Moines Nat. Bank, 122 Iowa 737, 743, 744. It was said in Hinkley v. Sac Oil & P. L. Co., 132 Iowa 396, at 409, 410:
“He is not required to suspect the promoters and directors of disregarding their obligations to those whom it was their duty to protect. "Where all seems fair, he is not bound to inquire as though the contrary were true. Of course, where the means of knowledge are at hand, and by ordinary diligence he should have ascertained the facts constituting the fraud, he will be charged with such knowledge. For the means of knowledge are equivalent to knowledge, and a clue which, if followed up with ordinary diligence, would, lead to a discovery, in law is equivalent to a discovery — equivalent to knowledge.”
It is added that this does not apply where plaintiff is lulled into security, “and did not suspect nor have any reasons to suspect the fraud practiced upon him, until a few days before beginning the action.”
It is said in Wood v. Carpenter, 101 U. S. 135, 141:
“ ‘The presumption is that, if the party affected by any fraudulent transaction or management might, with ordinary care and attention, have seasonably detected it, he seasonably had actual knowledge of it. ’ ”
“ ‘"Whatever is notice enough to excite attention, and put the party on his guard and call for inquiry, is notice of everything to which such inquiry might have led. When a person has
And if the defendant “should have known of the fraud by the use of reasonable care and diligence,” and obtains a benefit before obtaining such knowledge, he may not assert the fraud. State Bank v. Brown, 142 Iowa 190, 199.
In the last analysis, the question is whether one who thinks himself defrauded, and then makes a compromise, can thereafter add to the amount received in settlement, by merely showing that, when the settlement was made, he had not made the discoveries that his then knowledge suggested, but has since made them, and so has discovered that the fraud was more injurious than he believed it to be when he settled. Precisely that was involved in Korn v. Becker, 40 N. J. 408 (4 Atl. 434). There, a daughter claimed that her mother had defrauded her into accepting an inadequate price. The complainant was defeated, not because one may not receive damages after discovering a fraud, but because, believing she had been defrauded, she entered into an accord and satisfaction for her damages.
7. While Allen v. Pegram, 16 Iowa 163, is an action on the law side, it does not follow that it prohibits rescinding in part and suing for damages in a law action only. Nothing indicates that the rule announced is not to obtain in a suit of equity.
8. Yoss induced the plaintiff and her parents to relinquish a claim of some $600,000 that the late W. P. Bettendorf had against his corporation on account of royalties. It appears, without dispute, that he never intended to assert such claim as a debt. Indeed, to have done so would have been a mere matter of bookkeeping; for, as he owned two thirds of the stock, he would have had to pay two thirds of what he received on account of royalties, and his brother the other third. It is true the release gave one third of whatever benefit resulted to the stockholding of the defendant, while, at the same time, it gave the same benefit to the third held by the widow and the parents. But the plaintiff fully realized that the defendant’s stock was obtaining this “advantage.” It is undisputed that Yoss advised this release because statements issued in the past had revealed no such indebtedness on part of the company, and because revealing it now might be dangerous to the credit of the corporation, al
It is undisputed that, for the reasons already stated, W. P. Bettendorf had declared that he would not assert this claim as a debt of the corporation. The way the court disposes of that is to say that Voss .also knew that the widow could take the fortune her husband had left her, and yet was under no obligation to heed his desire as to relinquishing said claim for royalties. All I care to say is that this is peculiar advice, coming from a court of conscience. Mr. Voss need not feel he was a bad agent or man, because he did not think along such lines as the majority suggest.
