185 Iowa 654 | Iowa | 1918
This argument necessitates a fuller analysis of the statute, or rather, of its penalties. The said act of the thirty-third general assembly provides that the capital stock of -any corporation issued in violation of the terms and provisions of statutes on this matter shall be void, and that, in suit brought by the attorney general on behalf of the state, a decree of cancellation shall be entered ; and, if the corporation has -received any money or thing of value for the stock, same shall be returned to the one from whom it was received. Section 3641-e is that any corporation violating the provisions of the chapter shall, on application of the attorney general, on behalf of the state, be dissolved, its affairs wound up, and its assets distributed among the guiltless stockholders; Section 1641-f, that any representative of a corporation, or any officer or agent thereof, who violates any of the provisions of the chapter, shall, on conviction, suffer fine or imprisonment.
1-a
It is true that, in the sense of receiving something for themselves, there was no consideration as to the sureties, no matter how much consideration there was as to the principal. But that is equally true whether the stock in question was void or not void. The sureties were not to receive and did not receive any of the stock, whether void or valid. But at this point the consideration to the sureties is what it always is: First, what the principal received; second, the detriment to the payee in having relied upon the undertaking of sureties, and then having the surety fail to respond to his undertaking.
1-b
The plea of material alteration is, of necessity, in the same case. If there was a material alteration of the instrument, there should have been no judgment against Smith. There was, and it is not appealed from. What has been said as to the validity of the stock as a consideration applies fully to this situation. Moreover, the alleged alteration was made at the request of Brown.
II. Now, it is defended that the notes were obtained by fraudulent representations. Of course, as to Smith, the judgment against him settles that this defense is not sustained. But it does not necessarily dispose of the defense by the sureties. Unlike said defense of want of considera
The court discharged the surety Gertrude Smith. This action cannot be sustained, on the evidence. All that appellee says on the subject is, “It is unnecessary to devote space to discuss the case against Gertrude H. Smith. The statute referred to in our brief settles that.” We take it this is a reference to the statutes dealing with the issuance of stock. Of this defense we have disposed. As to false representation, there is absolutely no testimony that any representation whatsoever was made to Gertrude EL Smith, or that she relied on any. The record contains scarcely more than an occasional casual mentioning of her name. It was error not to enter judgment against her, as well as against her principal, Smith.
III.' It is claimed Smith made certain false representations to Brown at the request of Sherman. This is denied, and appellant contends further that they were but the expression of an opinion. We need not settle the dispute over this, because it is conclusively made to appear that Brown refused to act on these alleged representations of Smith's, and did not rely on them. All that ivas relied on, if anything was, are alleged false representations made by Sherman after Brown refused to act on what it is claimed Smith said. And we address ourselves to the conduct.of Sherman.
3-a
The definite allegations in pleading are that Sherman fraudulently represented :
We- have first to say that the alleged false representations are not nonactionable opinions. Assume one knows that a concern has, for six months, been doing business at a loss; that it is largely in debt, has been compelled to borrow to meet debts and running expenses, and has delinquent taxes: and he is guilty of a fraudulent and actionable misrepresentation in saying that the concern is doing a good business, and that a fine business has been built up and the builder was doing well therein and is making money.
As to the alleged representation that the business was such as that Smith would be able to meet the installments on the notes as same fell due, we think that is the statement of a nonactionable opinion, because it declares a deduction as to the future. Brown testifies, on cross-examination, that Sherman used the words “in my judgment,” in saying that Smith 'would pay out. And it has bearing that Smith did pay fourteen $100 installments out of the business. And it is doubtful whether there was any reliance; for Brown testifies he said he (Brown) could not see how a business incorporated for $5,000 could maintain itself, pay clerk hire, rent, taxes, insurance, support Smith and his family, and pay $1.00 a montji.
Is it proved the business was operated at a loss for six months before Brown signed, or; if it was, that plaintiff knew it when he stated what is charged? Consideration of the true condition comes first. If it be not shown that a falsehood was told about it, there is no room for inquiring into scienter. What is the evidence for the claim that the business was operated at a loss for more than six months before Brown signed? The consideration of the question resolves itself into settling a conflict between Smith and Sherman, and between Smith and matters that are either undisputed or conclusively established. There is nothing in the record that impeaches Sherman. On the contrary, it is not easy to understand what motive he could have for making fraudulent representations to obtain the signature of sureties. Even if the drug stock was below par, and the business unprofitable, without sureties, Sherman had ample security given him by Smith, and surrendered Smith’s securities to him after the signing of the notes by defendant sureties. In these circumstances, Smith’s testimony might naturally be colored by' a desire to let Sherman have nothing but the note of Smith, which does not appear to be valuable, and to obtain the release of Smith’s wife and his father-in-law. And the credibility of Smith’s testimony is otherwise affected. Time and again, he squarely contradicted himself, and had to retract on material matters, either through the stress of cross-examination, the production of his own letters, or of indubitable other evidence. These instances are too numerous to be detailed without unduly extending this opinion. A few, however, are illustrative. He testifies repeatedly that an injunction granted in December, 1908, prevented him from selling liquor, and that, after its issuance, he sold no liquor, — and this though
4-a
Is the statement 'that the business was a good one proved a false one?
Notwithstanding the testimony of Smith to the contrary, it appears, by the evidence of the record of sales,
“You will note quite an increase in sales, which increase I hope to keep up; also the collection of accounts I have every reason to believe will become very satisfactory, so we may look for something in the shape of dividends before many weeks.”
Smith was buying this drug store at the very time the notes were being signed; knew all about it; and thought
It is true that, during several, months of the year 1908, Sherman was not satisfied that the business was being kept up to the proper pitch, during some of the months. It should be remembered these letters were written in comment upon statements of Smith to which we have before adverted. Sherman states his views thus:
“So far as I am able to learn, the business had not, in the three years Smith was at Lohrville, suffered any loss of volume of business to any extent, though there might have been a month here and there which was less or more.”
Whatever the effect of these facts may be upon scienter, they give no support to the substantive charge that the representations made by Sherman were, in fact, false. It has no tendency to prove that the business was in a ruinous condition because Sherman, on receiving optimistic opinions and reports from Smith, felt moved to say that he was, for the time being, not satisfied, and urged Smith to increase the volume of sales. Had the business, in fact, been losing ground, and unprofitable, these letters from Sherman would bear on his knowing this to be so. But, where the evidence shows the-business was, in fact, not suffering, conplaints by Sherman and his urging an increase of sales do not prove that the business was not prosperous.
4-b
“Thus, if a party taking a guaranty from a surety conceals from him facts which go to increase his risk, and suffers him to enter into the contract under false impressions as to the real state of the facts, such a concealment will amount to a fraud, because the party is bound to make the disclosure, and the omission to make it under such circumstances is equivalent to an affirmation that the facts do not exist.” Story on Equity Jurisprudence (12th Ed.), Section 215. See Burks v. Wonterlin, 6 Bush (Ky.)20, 22.
There are a good many things that operate to release a surety; and the six Iowa cases cited for appellee release sureties. The difficulty is that the citations are irrelevant. They have no bearing on whether anything in this record works a release. Let us take up some of the alleged concealments, — all but one of them, which will be considered separately.
It is complained Sherman said the book accounts were worth $1,000, and did not inform they were worth not over-$400; that he did not tell that the tangible assets consisted of much old, rundown stock, bought of a former owner, and that it would not invoice as much as $2,500. We think the pleadings do not seek relief because of such concealment, and that there is no evidence the book accounts were not worth more than $400, or that the stock of goods was in said condition.
The next complaint is, Sherman did not tell of letters which complained of the business falling off from July to October, 1908. This alleged concealment, too, is not relied on in pleading. At any rate, the sole materiality of such complaint by Sherman is that it- bears on scienter,
4-c
To be sure, Sherman testified that no mention Avas made of any debt owing to the Des Moines Drug Company. Some nine months before the notes were signed, there was a debt due that concern; but, at that time, Smith wrote Sherman an argument in support of Smith’s hope that he would soon clean up this debt. Moreover, Sherman had assumed this debt. It is presumed he is solvent, and the record indicates affirmatively that he is. For all practical purposes, this item had ceased to be anything that the Lohrville Drug Company would be called upon to pay.
4-d
Appellees say Sherman admits he did not inform Brown of a debt owing the Lohrville bank. This is not very material, unless it appears that there was a debt due that bank, and that Sherman had knowledge of it. It does appear that, in February, 1908, the drug company owed two notes aggregating $450. It does not appear that they were owing to the Lohrville bank. On the contrary, Smith wrote what would tend to make Sherman believe there was no indebtedness to said bank; for, on February 29, 1908, he wrote that the balance at the bank was $64, and that he hoped soon to increase it materially, and he made no mention of any indebtedness owing the bank. The natural construction of it was to take it as an assurance that, while the debt was small, it Avas the bank that Avas the debtor.
4-e
We cannot trace the statement of Smith that, in February, 1908, there were two notes aggregating $450, beyond one note which he claimed was a note for $200, and which, the evidence shows, was for $174.58. But this note was made before the corporation was formed, and was not its debt at all, when the notes in suit were signed. Moreover,
4-f
It is not so material that Sherman says he did not inform of “the other debts,” as is the question what other debts there were 'to inform of. At the time of the sale, and before the notes were signed, Sherman had, in effect, relieved the corporation of the debt of something like $1,000 due the Des Moines Drug Company. Eliminating this, and certain goods held virtually on commission, and with the right of return, the debts of the corporation, at the time the notes were signed, consisted of $56.88, due the Western Bottle Manufacturing Company, $4.80, due the Continental Compound Company, and $31.82 due the W. L. Yetter Company, — a total of $93.45. Some 18 days before the notes were signed, Sherman had written Smith to reduce indebtedness materially within 30 days. It is elementary that neither misrepresentation as to or concealment of an immaterial matter will release the surety. It is said, in Comstock v. Gage, 91 Ill. 328, at 336, that, in order that failure to communicate a fact to a surety should have the effect of a fraud, “it must be a fact which necessarily must have the effect of increasing the responsibility of the surety, or operating to the prejudice of his interest.” It must be a material or inducing concealment. Security Sav. Bank v. Smith, 144 Iowa 203, at 210. Even if we assume, upon the testimony of Smith, that Sherman said to Brown there was no indebtedness, the fact remains that the indebtedness was, as to a business of the size of this drug store, trifling. In Chace v. Brooks, 5 Cush. (Mass.) 43, it was held that the accidental omission of a small amount of indebtedness, which did not materially increase the liability of the guarantor, would not release him. In Powers v. Clarke, 127 N.
4-g
There is no scienter. Aside from the fact that the indebtedness was, in fact, inconsiderable, Sherman had every right to believe that it was inconsiderable. In February. 1908, Smith wrote Sherman that the bank balance was unusually low, because of extra efforts to pay bills, and that there was practically no need to buy anything. In January and in March, Smith wrote in a way that advised Sherman the indebtedness consisted of small items, aggregating a small amount; and, something like a month before the notes were signed, that Smith would proceed with collections as urgently as possible, and that he was “satisfied bills will all be paid, and something left by December.” And Sherman testifies he considered the debts of the corporation were all taken care of.
So far. we have assumed Sherman represented there was no indebtedness. Smith says he did so represent. But Brown testifies the statement was that the concern had “practically no other debts, but might have said they had a few small bills, current expenses, or things of that kind.” Certainly, the record justifies such a statement as that.
4-h
The only delinquent taxes were $51 for 1906 taxes, and $26.56 for the second half of 1907. Sherman did not inform Brown of this delinquency. If we assume that failure to inform of this is the equivalent of having represented fraudulently that it did not exist, and that the pleadings cover such a misrepresentation, it remains true that a tax
4-i
There is no evidence that money was borrowed to pay debts and running expenses.
The proof fails to establish any right to release the sureties because of fraudulent representations to the effect that the trade was good and that the store was doing a nice business. The essential complaint is that it had run at a loss for six months, and was heavily indebted. The proof does not so show.
“I do not believe they have very much against us, and hope we can beat them to it. Eflowever, should an injunction be granted, it will be November 1st before it is in effect, and as there is no local opposition at all here, we believe it can be dissolved at an early date. My attorney and I went through all the reports since January, 1908, and could find no error of any kind.”
And in a letter of October 11, 1908, speaking of depositions to be taken, Smith wrote:
“I have looked each witness up carefully, and am satisfied that they will do me no harm at the hearing Friday, which makes -our case look more hopeful. Personally, T believe we have an excellent chance to win out.”
Sherman testifies that, while the proceedings were pending, there was a question whether injunction would be granted. It may be conceded the correspondence shows Sherman was of opinion that, if an injunction were granted, it would compel operating the business without profit, if not at a loss. Be that so, yet the ultimate claim of the appellees is that, whatever might be true of the mere pend-ency of the injunction proceedings, the entry of the injunction worked substantial injury, because the concern could thereafter sell no liquor; and that this inability to sell liquor “took away all of that business, and hurt the business in other ways, and hurt the town more or less, so that our business fell off in all lines by the fact of that injunction; and after the injunction was granted, our sales fell off at once, — I would say fully 50 per cent.” Now, if the fact that business thus fell off after the injunction was granted settles that this was due to the granting of the in
VI. The purpose was to sell the shares for their true value. The parties estimated that value to be $3,300, and Smith says they were worth not over GO per cent of that. It is pleaded that, if the correct amounts of the debts had been deducted, the 33 shares would have had an estimated value of but $1,800, and that, therefore, the estimated consideration put into the notes is too large by $966.06; and it is additionally prayed that, because of mutual mistake, the notes should be reformed by giving credit in $966.66 as of the date of the note. There is no proof that justifies reformation.
VII. Both sides urge that the other was guilty of laches. We have no occasion to consider the claim. No laches is pleaded, nor is there any substantial evidence of any. The issue may not be raised on this appeal for the first time.
The decree is reversed. The trial court will enter judgment for plaintiff, as prayed, against the defendants Gertrude Smith and O. O. Brown, or, at his election, appellant may, in rule manner, obtain such decree in this court.— Reversed.