THE

NORTHWESTERN REPORTER

VOLUME 160

GARBERSON v. SHERBON et al.
(No. 31007.)

(Supreme Court of Iowa. Nov. 24, 1916.) APPEAL AND ERROR 1011(1)-CONFLICTING EVIDENCE-TRIAL BY JUDGE.

In an action to establish and foreclose a mechanic's lien for the purchase price of a fur

tiff in the amount claimed by him. The issues were solely of fact, and the testimony is very conflicting. That there was a warranty substantially as claimed by defendants is conceded, and about the only question in the case is whether or not there was a breach of this warranty.

After the installation of the furnace, upon nace, the defense being breach of warranty of complaints made by the defendants, plaintiff heating capacity thereof, and the case being put in a new and larger sized boiler and intried to the court, conflicting evidence, includ-creased the radiation in the several rooms in ing apparently disinterested testimony of an

expert witness for defendant, finding but little the house, and it is affirmed on the one side, fault with the heating plant, and this fault and denied on the other, that after the easily correctible, held to warrant affirmance of

judgment for plaintiff, in view of weight to be given to trial court's opinion.

[Ed. Note.-For other cases, see Appeal and Error, Cent.Dig. §§ 3983-3988; Dec.Dig.1011(1).]

Appeal from District Court, O'Brien County; W. D. Boies, Judge.

"Not to be officially reported."

Action to establish and foreclose a mechanic's lien upon premises owned by the defendants for the purchase price of a furnace which was installed by plaintiff in and upon said premises. Defendants pleaded a warranty by plaintiff to the effect that the furnace would be properly installed and constructed, of sufficient capacity to heat the house evenly and to a temperature of 70° when the outside temperature was 20° below zero, that it would consume less coal than a hot water or steam system and work to their satisfaction, that this warranty has been breached, and that they took out the furnace on account thereof and notified the plaintiff of their intention to do so and left the same for the plaintiff upon defendants' own premi

ses.

On these issues the case was tried to the court, resulting in a judgment and decree for plaintiff, and defendants appeal. Affirmed.

J. T. Conn, of Hartley, and Herrick & Herrick, of Cherokee, for appellants. T. E. Diamond, of Sheldon, for appellee.

PER CURIAM, The case was submitted to the trial court upon testimony taken in open court, and, after hearing the evidence, a judgment and decree was entered for plain

change the furnace would not and could not be made to work as guaranteed. Upon this proposition there was, as we have said, a sharp dispute in the testimony. The trial court, basing its judgment upon the testimony of a disinterested expert called by the defendants, and a letter written by one of the defendants, concluded that defendants had not made out their case of breach of warranty by sufficient testimony and awarded a decree to plaintiff as claimed. With such a conflict in the testimony as this record presents, it is difficult to say who is in the right; for the cold printed page is not always a sufficient guide to a correct conclusion. Something depends upon the manner and disposition of the witnesses, their apparent bias, or the contrary; and for this reason even in equity cases some consideration must be given to the findings of the trial court. In this connection, however, we may say that we do not give much weight to the letter written by one of the defendants standing alone as the trial court did; but we do concede that the testimony of defendants' expert, who was an entirely disinterested witness, is entitled to great weight. This witness found but little fault with the heating plant, and this fault could have been easily corrected, had plaintiff's attention been called thereto. This was not done. Instead, defendants proceeded to remove the plant and to install a new one. Were the matter to stand on the record alone, we might have some difficulty with it; but giving to the opinion of the trial court some weight, as we must because of its superior advantage in

For other cases see same topic and KEY-NUMBER in all Key-Numbered Digests and Indexes

seeing and hearing the witnesses, we are value of defendant's capital stock in the disposed to affirm. Knowlton Manufacturing Company, a corpoThe decree must therefore be, and it is, ration. The indebtedness was evidenced by affirmed. a note given for the purchase price of the stock, and the consideration for the note was EVANS, C. J., and DEEMER, WEAVER, the four shares of stock in the corporation. and PRESTON, JJ., concurring.

that the corporation on January 27, 1913, be- president of the corporation, and that the ing insolvent, made an assignment for the benefit of its creditors of all its property and credits to plaintiff Bradshaw, who qualified as such assignee and is in possession of all its property. That neither the $2,500 note nor the $200 note have been paid. Plaintiff asks judgment for the amount of the $200 note, with interest.

By an amendment to the petition plaintiff alleged that the consideration for defendant's $200 note was four shares of stoek in the Knowlton Manufacturing Company, which stock was original stock subscribed for from the corporation itself; that the law of the state of South Dakota with reference to the liability of stockholders in a corporation is as follows:

plaintiff Johnson was the treasurer thereof from May 24, 1912, to the assignment, and that one A. E. Stowell was employed by the corporation and its officers for the purpose of selling stock in the company; that prior to the purchase of the stock by plaintiff for which the note in suit was given said Knowlton represented that said stock was a good investment and that it had paid a dividend of 37 per cent. up to that time; that if it had more money it would pay better than 100 per cent. in a year; that the investment would pay defendant better than real estate; that said Knowlton represented to defendant that the company had a patent covering the Knowlton engine, to manufacture which the company was organized; that such state

Substantially the same matters were set out by defendant as a counterclaim, and asking a rescission of the contract and that his note be returned. The allegations of the answer were denied by plaintiff's reply, except it admitted that Stowell solicited defendant to buy stock; admitted that the note was given for four shares of stock; admitted the assignment of the corporation. The statutes of South Dakota were proved. At the time the note was given defendant was a resident of South Dakota, and the place of business of the corporation was in South Dakota.

"Each stockholder of a corporation is individ-ments were untrue; that plaintiff Johnson ually and personally liable for the debts of the also represented to defendant that it was a corporation to the extent of the amount that is good investment, as did Stowell; that defendunpaid upon the stock held by him. Any credi- ant relied upon such representations and purtor of the corporation may institute joint or sev- chased the four shares of stock and gave his eral actions against any of its stockholders that have not fully paid the capital stock held by him, note therefor. In the answer defendant tenand in such action the court must ascertain the dered back to the corporation and to the asamount that is unpaid upon the stock held by signee the certificate of stock, and asked a reeach stockholder and for which he is liable, and several judgment must be rendered against each scission because of the alleged fraud, and in conformity therewith. The liability of each further alleged that at the time he purchased stockholder is determined by the amount unpaid said shares of stock and gave his note the upon the stock or shares owned by him at the time such action is commenced, and such liability corporation was insolvent, and that the is not released by any subsequent transfer of shares were worthless and of no value, and stock. And in no other case shall the stock- that therefore there was no consideration for holders be individually and personally liable for the note. the debts of the corporation. The term "stockholder," as used in this section, shall apply not only to such persons as appear by the books of the corporation to be such, but also to every equitable owner of stock, although the same appear upon the books in the name of another, and also to every person who has advanced the installments or purchase money of stock in the name of a minor, so long as the latter remains a minor, and also to every guardian or other trustee who voluntarily invests any trust funds in the stock. Trust funds in the hands of a guardian or trustee shall not be liable under the provisions of this section by reason of any such investment, nor shall the person for whose benefit the investment is made be responsible in respect to the stock until he becomes competent and able to control the same; but the responsibility Appellee's contentions, and upon which he of the guardian or trustee making the invest- cites authorities, are that the plaintiff Bradment shall continue until that period. Stock held as collateral security, or by the trustee, or shaw, as assignee of the manufacturing comin any other representative capacity, does not pany, has no interest in the note in suit, make the holder thereof a stockholder within the because the other plaintiffs are pledgees of meaning of this section, except in the cases the note, and are the only plaintiffs shown to above mentioned, so as to charge him with the debts or liabilities of the corporation; but the have the right to collect on said note; that pledgor or person, or estate represented, is to be the amendment to the petition setting out the deemed the stockholder as respects such lia- South Dakota statute did not give the asbility." signee any additional interest in the note; Defendant for answer admits the incorporathat the manufacturing company, having tion of the company; admits the execution of pledged the note to plaintiffs, could claim no the $200 note and the assignment of the cor- interest as against them, and the assignee poration; denies the execution of the $2,500 could derive from the company no greater note; denies that the note was pledged to interest than it had; that the corporation had plaintiffs; admits that the $200 note has not the right to prefer a part of its creditors as been paid. The execution of the $2,500 note against others. They contend also that the and that the $200 note, with others, was evidence sustains the defense set up that depledged as alleged by plaintiff, was estab-fendant's subscription was procured by fraudlished by the testimony. For further answer ulent representations, and the defense of

4

through false representations, and that the cases cited by appellants so show.

of the corporation exceeded $25,000 at the time defendant purchased the stock, while We think the cases are otherwise. There its assets were less than $15,000, and that therefore the company was insolvent. They is no dispute in the evidence that defendant contend further that, having shown fraud made no attempt to rescind for a consideraand want of consideration in the inception of ble time after the transaction, and not until As stated, dethe note, the burden is on plaintiffs to show after the suit was brought. they were bona fide purchasers; that plain- fendant subscribed for the four shares of tiffs, as pledgees, without indorsement of the stock of the corporation on July 2, 1912, and note, are subject to any defenses existing the shares of stock were issued and delivered against the payor; and, finally, that the to him at about the same time, and he then trust fund doctrine contended for by plain- gave his note for $200 in payment therefor. tiffs applies only to bona fide creditors, and In January following the company made an not to creditors charged with notice of fraud assignment for the benefit of all its creditors. or want of consideration, as they claim plain- The note of defendant was pledged, with tiffs in this suit are chargeable. On this last other notes, as collateral security with plainproposition appellee cites State Trust Co. v. tiffs, other than the assignee, to secure the The defendant Turner, 111 Iowa, 664, 82 N. W. 1029, 53 L. payment of the $2,500 loan which said plainR. A. 136; Taylor v. Bank, 9 S. D. 572, 70 tiffs made to the company. N. W. 834. These last cases do not involve did not, either before or after the insolvency of the company, attempt to rescind the conthe question upon which we think this case must be determined, and that is as to wheth-tract for the purchase of his stock or tender er or not the defendant, having failed to take back to the company the certificates until any steps towards a rescission of the pur- the filing of his answer in this suit, which chase of the stock, and the note, for a considerable time after the purchase was made and the note given, and until after the corporation had made an assignment for the benefit of all its creditors.

was February 10, 1914, more than a year

after the insolvency of the company and its assignment. And he did not then make an actual tender of the certificate, but in his answer in a law action he did tender it back. Because the contract was made in South

The appellants contend, as their first prop Dakota, and the note by its terms was payosition, that under the circumstances shown in this case it is too late for the defendant able there, the liability of defendant should be determined by the laws of the state of to rescind his subscription to the capital stock, the consideration of the note, on the South Dakota. It would seem that under the ground that he was induced to subscribe on South Dakota statute before set out the liaaccount of fraudulent representations of the bility of the stockholder is statutory and absolute. This liability created by statute corporation's agents, after the corporation had made a general assignment for the bene- is a part of the contract of each creditor. The Supreme Court of South Dakota has fit of all creditors before the suit was brought, and that defendant has neither passed upon this question in the recent case of Keyes v. Blue Bell Medicine Co., 34 S. pleaded nor offered evidence that he used any D. 297, 148 N. W. 505. In that case plaintiff diligence to discover the fraud he alleges was practiced upon him either before or after claimed that the contract whereby he purthe corporation made the assignment. Other chased stock from the corporation was inducpropositions of appellants are that, even if it ed by fraud, and after the insolvency of the be competent under any circumstances under corporation attempted to rescind the contract. The court said: the facts in this case for a stockholder to interpose the defense of fraud in inducing the subscription and to seek a rescission of the contract, still the evidence in this case does not show such diligence by defendant as is required by law to discover the fraud and to rescind the contract; and, third, that the representations pleaded by defendant and testified to by him do not constitute such fraud as would warrant him in rescinding the contract. We are of opinion that appellants' first proposition is sound. This renders it unnecessary to determine the other points.

[2-5] 1. Many authorities are cited by appellants to sustain his first proposition. Appellee contends that these cases are not in point, for the reason that the doctrine contended for by appellants applies only for the benefit of bona fide creditors, and that it does not apply where, as they contend is the fact in this case, the contract was procured

"Appellant first contends that the trial court Inasmuch as the erred in failing and refusing to make a finding upon the question of fraud. trial court found that the attempted rescission came too late, and inasmuch as we sustain such finding, it becomes unnecessary to consider that question. At the time of the transfer the comrescission it was insolvent, and had been in the pany was solvent. At the time of the attempted hands of the receiver about 52 months. Unpaid claims in excess of $58,000 had been filed with the receiver, and there were not enough assets to pay the claims. Plaintiff had been the owner of the shares of stock more than 2 years, and had never received a dividend thereon. must be charged with laches in asserting his claimed right of rescission, Through delay and owing to the insolvency of the corporation he has lost such asserted right. Morawetz on Corporations, § 839; Cook on Corporations, §§ 161, 164; Jones on Insolvent and Failing Corpora tions, § 399; Fear v. Bartlett, 81 Md. 435 [32 Atl. 322] 33 L. R. A. 721; South Bend Toy Manufacturing Co. v. Pierre Ins. Co., 4 S. D. 173 [56 N. W. 98]."

Plaintiff