Hubbard v. WeareHubbard v. Weare
- Reporters:
- , ,
- Before:
- Griyen
I. Counsel have discussed with evident care and ability, and with extended citations, certain questions of law to which we first give attention. To notice each of the points made and authorities cited would extend this opinion to an unwarranted length.
We regard it as well settled in this state that, though equity will relieve against false representations innocently made, the law will not afford relief on the grounds of false and fraudulent representations, unless it be shown that the party making the representations knew them to be false, or that he made them under circumstances from which such knowledge will be inferred. We do not discern why a different rule as to scienter should apply in actions against officers of corporations, or those making false respresentations as true of their own personal knowledge, ’ from that applied in other cases of false and fraudulent representations. The fact of guilty knowledge may be established in such cases by quite different proofs from that which would apply in others, but the rule that knowledge must be proven is the same. Appellants contend that, as these cases were brought and are being prosecuted in equity, they are entitled to relief without proving the scienter. As the cases were brought and have thus far been prosecuted in equity without objection, and are now submitted upon the whole record for trial de novo, we will consider them as in equity, without, however, determining whether they were properly so brought or not. ’ We are clearly of the opinion that, whether tried at law or in equity, the same rule as to scienter must apply; for, clearly, we cannot have two *687different rules of law in the same state, for the same case, in the same court. If the relief asked, other than the recovery of damages, would make the cases of equitable cognizance, and triable in equity, still the question of damages must be measured by the same rules that would apply if tried at law.
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Y. Such being our conclusions as to the law, it remains for us to determine, from the facts in the cases : (1) Whether the defendant did make, or cause to be made, to the plaintiffs or either of them, as true, one or more of the representations alleged; (2) whether such representation was made to induce the plaintiff to whom made to act as it is alleged he did act; (3) whether the representation made was false; (4) whether the defendant knew the same to be false at the time of making it; and (5) whether the plaintiff relied upon the representation so made as true, and acted thereon, as alleged, to his injury.
YI. Before noticing the cases separately, we state the following as the most important and controlling of the many facts appearing- in a somewhat voluminous record : Dyer Williams was the owner of a patent right for a certain kind of mower and reaper, together with a lot of patterns, moulds and machinery for manufacturing the same. In May, 1878, the Williams Harvester Company was incorporated for the manufacture and sale of these machines and others, with a capital stock of eighteen thousand dollars of which the defendant Weare took five thousand dollars, and the plaintiff Hubbard five hundred dollars, for which each paid in cash. The balance was taken by different persons, and paid for in cash, or property wanted by the company, at *690reasonable values. The company continued in business up to 188 — , when it was forced to suspend for want of funds, and because of its property being applied in paying or securing its indebtedness, of which a considerable amount remained unprovided for. An improved machine was invented in 1880, and to a limited extent placed upon the market in competition with this company’s harvester, in 1882, and more generally in 1883 and thereafter. This was no doubt one of the causes of the decline in the company’s business, but does not fully account for the losses reported September, 1882, for to that date the competition was limited. To meet this competition, the company set about inventing and manufacturing a self-binder of its own, which, however, was not so far perfected as to be put upon the market during the life of the corporation. Considerable sums were expended in constructing this new machine. At the time of the organization the company purchased a manufacturing establishment with the view of converting it into an establishment for the manufacturing of their machinery. They also purchased a new location, to which the old establishment was moved. Statements of assets and liabilities were made to September first of each year by the superintendent and bookkeeper to the board of directors, on which, and so far as appears without further investigation, the board declared dividends as already stated; all of which were payable in stock, except the dividend for 1881, which was payable in one and two years, with six per cent, interest. No dividend was declared for 1882, there being a loss for that year. June 16, 1883, a committee was appointed to revise the statements of the company’s business up to and including 1881. Their report made July 24, 1883, shows a loss of $34,798.50 in 1881, instead of a profit of $13,856.35 upon which the dividend was declared. Their report was based upon valuations as they found them to be in 1883, and not as they were in 1881. During these years, and for many years preceding, the plaintiff Hubbard and defendant were upon intimate business and social relations. Each seemed to have had full confidence in *691the business capacity and integrity of the other. They were both men of large business experience, —Hubbard as a lawyer of extensive practice, and Weare as a capitalist and banker. Weare was president and director of the Harvester company from its organization, and gave to the business of the company his personal supervision. Hubbard was a stockholder, and for a time one of the directors. He occasionally attended the meetings and visited the works, but did not exercise any direct supervision over the business, and did not at any time investigate the books of the company so as to know its condition financially. The plaintiffs, Herveys and Savery, were personal friends of Hubbard, but strangers to Weare. It was through Hubbard that Herveys took the stock, he subscribing for it for them; they making the payment and receiving the-stock certificate in their own names. In doing so, they relied wholly upon what had been represented to them by Hubbard, as neither ever had any interview with Weare on the subject. Savery, acting upon representations made to him by Hubbard, sought and had an interview with Weare, after which he subscribed and paid for his stock. Savery had no knowledge of the company’s affairs, except as gained through Hubbard and Weare; and Herveys had no knowledge concerning it, except as gained through Hubbard.
VII. Taking the cases in their order, we first consider that of’ the plaintiff Hubbard; and, first, as to the representations by which it is alleged he was induced to take and pay for stock. In view of the intimate relations between him and Weare, the relations of Weare to the company, his confidence in its ultimate success, and the evident desire to interest men of means, and in whom he had confidence, in the enterprise, leaves no doubt in our minds but that defendant did, from time to time, and for the purpose of inducing Hubbard to take stock, make the representations alleged. Indeed, it is scarcely denied that he did make those representations, and as being true; for he still contends that they were true, according to the facts as known at the time.
*692YIII. Having found that the representations were made, we next inquire whether they, or either of them, were false. The representation that the company was well organized does not affect the rights of the parties in these actions. It is- immaterial to their rights herein whether the amendments to the articles of incorporation were properly acknowledged or not. The grounds upon which it is claimed that the corporation was not conducted upon a good business basis is because dividends were declared when the same had not been earned; hence we do not consider this allegation separately.
There was included in this statement of assets, “Moving account, $67.58;” and, in the statement for 1880, “Moving account, $1,608.41.” If does not appear with certainty what these items represent.. Appellants contend that it is money paid out for removing the works from the old to the new location. Appellee suggests that they represent the cost of bringing property the company had purchased and made a part of the plant from Chicago or elsewhere. We see no other reasonable explanation than that it was *693money paid out for moving machinery or materials, or both, that went into the buildings, and is, therefore, proper to be included in the assets; but not as a separate item, if the aggregate value of the buildings into which it entered is given. In 1879 the buildings were not valued as a whole, but in 1880 they were. The $67.58 was, therefore, properly included as a separate item, and the $1,608.41, in 1881,. was not.
. “Fair machines account, $144.97,” was included as assets. Here, again, we are without definite explanation. Appellants contend that it was money paid out as expenses in exhibiting machines at the fairs, while appellee suggests that it represents machines on hand made for exhibition. Judging from the other items of the inventory and the amount, we conclude that it does not represent machinery on hand, but expenses of exhibiting machines. Whatever benefit comes to the corporation for such expenditure must be in the way of the enhancement of the value of its property and business, and not as in the case of the purchase of property which remained on hand. Entering, as it did, into the value of the general assets, it was covered by the estimate placed thereon, and should not have been included as a separate item.
“Outstandings, $22,821.39,” was stated as assets in 1879. This is understood to include accounts mostly* with agents and their customers for machines, some of which were in the hands of agents; others of which had been sold. No deduction was made for shrinkage or loss in collections. That a loss would occur is inevitable, and, though that loss could not be determined with exactness, experience would indicate about what it would be. Without such an approximation, the result would not show with any reasonable certainty the state of the company’s affairs.
The statement for 1880 included as assets, “Accrued interest on bills receivable, $756.22.” .There is nothing included in liabilities for interest on the thirty-five thousand, .five hundred dollars bills payable. It is argued that bills payable were largely to banks and for *694merchandise; that bankers require interest in advance; that the company, being prosperous, paid at maturity, so that no interest was accruing against it. Common’ experience, and the subsequent history of the company, hardly warrant such a conclusion. We think that an approximation should have been made of the accrued interest for which the com pany was liable.
“Material and labor expense on self-binder, $1,708.78,” was also included as assets in the statement of 1880. This represents what. had been expended in the effort to perfect the new self-binder. Valuations in 1880 were to be made according to what was then known. The value of this machine, other than as old iron, depen ded entirely upon whether it could be made to work successfully. It was not possible at that time to determine what its real value was, and hence it was put in at what it had cost. Those having confidence in the success of the invention no doubt valued it very highly, while those not having such confidence might not give it any value. The object of valuing the assets was to see whether any profit had been actually earned up to that time that might be divided among the \shareholders. It required future developments to determine whether the binder was of any value or not, ^and until it had an actual value it should not have been ^included as assets. The amount expended upon it was not assets, but a loss, that would come back or not, as the. machine would or would not prove successful. Surely, as yet, there was nothing in the machine to divide; and in estimating the profits for the purpose of division, and as an inducement to persons to take stock, no such an uncertain element should have been included.
We have already considered the $1,608.40 moving account included in the estimate of 1880. There was also included, “ Expenses, $891.99.” We are unable to see how money that had been paid out as expenses can be considered as assets on hand for distribution, except as it has entered into the property on hand in the enhancement of its value. The property being estimated at its value, this item should not have been included.
*695“Bindery account, $2,919.59,” is included in the statement of assets for 1881 as profits. Appellants claim that it was a total loss, and should have gone to the other side of the account, thus making a difference in the result of $5,839. The status of the new binder was about the same in 1881 that it was in 1880; that is, it was incomplete, and it had not yet been demonstrated whether it would be successful or not. While we are not prepared to say that this sum should have been included as a loss, we are satisfied, for the reasons already stated, that it should not have been included as profits or assets. No dividends were declared for 1882.
The results arrived at by the committee, in its review of the statements up to and including 1881,- are not entitled to much consideration, as their estimates were based upon facts disclosed following the several dates at which dividends had been’ declared. In determining whether the dividends were earned, we must take the facts as they existed at the time they were declared. From what we have stated, it will be seen-that our conclusions are that it wás not true that the company had made large gains and profits, and had actually earned the dividends declared, nor that a greater dividend might have been declared in .1880 or 1882.
Reversed.