Williams v. Riddlesperger , 217 Ala. 62 ( 1927 )

In the companion case of Williams et al v. Bedenbaugh,215 Ala. 200, 110 So. 286, which arose at the same time out of the identical transactions by and between these parties, and was tried on the same pleadings, all the questions of pleading here presented were definitely considered and determined.

Counts identical with count 3, as amended, and counts F and G, herein, were there held as defective and subject to the demurrers interposed. See headnotes 8-12, and 16-18. Counts C and E herein were there held sufficient; and the replication to the plea of the statute of limitations was held defective, and subject to the demurrer.

We are content to reaffirm each of those rulings now, with the result that the judgment must be reversed and the cause remanded for another trial.

With respect to the liability of the defendants Williams and Ellis, the evidence clearly presented a case for the jury; and the general affirmative charges requested were properly refused.

The chief question for consideration on this appeal is whether or not, under all the evidence, the defendant Preston can be held liable for the misrepresentations and concealments charged by the plaintiff directly against Preston's associate stockholders and directors, Williams and Ellis.

There is nothing to show that Preston ever personally made any statements to plaintiff, or had any conversation with her, with respect to the business and financial condition of the Walker Buick Company, or had any personal connection with the sale to plaintiff of the corporation stock purchased by her. It does appear that, as director and treasurer of the company, he was actively cognizant of its affairs, and was well informed as to its financial condition and business prospects when its president, Williams, sold the stock to plaintiff in 1923, and for some time previous. For the fiscal years ending with June, 1922, and June, 1923, no profits had been earned; and surplus assets of $15,000 over corporate indebtedness, reported as of June, 1922, were converted into a deficit of $13,000 by June, 1923.

After Williams and Ellis had made the misrepresentations to plaintiff, as alleged, a meeting of the three directors was held, and Williams reported to them that a sale of the stock could be made to plaintiff. Williams' testimony is:

"We had a meeting (January 5, 1923), and agreed in this meeting that we would sell as much as $10,000 worth of stock, and then Mrs. Riddlesperger's specific proposition came up and was acted on favorably at this meeting."

He further stated that the three directors — these defendants — then agreed to issue to her the stock, and that 25 shares were issued to her on January 8, 1923, and 25 additional shares were issued on January 15, 1923.

"Corporate directors are not individually liable to purchasers of corporate stock who were induced to become purchasers by reason of a false prospectus, where such prospectus was prepared and issued, without their knowledge or consent, by another director. Neither are they liable for the representations of an agent of the corporation, acting as such and not on behalf of the directors." 14A Corpus Juris, 185, § 1962. And the general rule is said to be:

"A director or officer is not, merely by virtue of his position, liable in all cases for the torts of other directors, officers, or agents; he is liable when, and only when, he participated in the tortious act, authorized or directed it, or acquiesced in it when he either knew, or by the exercise of reasonable care should have known of, it, and should have objected and taken steps to prevent it."

With respect to existing stockholders, a failure by directors to inform them of their company's insolvency, or bad financial condition, before inviting or receiving their subscriptions for additional stock, would undoubtedly amount to actionable fraud, because the relationship is one of trust and confidence. King v. Livingston Mfg. Co., 192 Ala. 269, 68 So. 897; Wolfe v. Underwood, 96 Ala. 329, 331, 11 So. 344. But as to outside persons there is no such relationship, and the mere silence of a director will not render him liable as for fraud or deceit in a sale of stock. Nor can the liability of a director be predicated upon acquiescence in, or ratification of, the fraud of a codirector, unless it appears that he had knowledge or notice of such fraudulent conduct.

Conceding, without deciding, that Preston was not, under the conditions stated, chargeable with notice of the fact that his associate officers and directors, Williams and Ellis, must have misrepresented the state of the business and the value of the stock in order to sell the stock to Mrs. Riddlesperger as a good investment, and therefore that they had in fact so misrepresented them, we think there is another basis for Preston's liability, which is well supported by the evidence. It appears that all of these defendants were liable to local banks, as indorsers of their company's paper, for large sums of money. Each and all of them had a powerful personal interest in the acquisition of new corporate funds for the payment of corporate debts to relieve their own obligations as indorsers and guarantors for the company. They jointly agreed upon the sale of corporate stock as a means of raising such funds, and the undertaking to do so was a joint enterprise for their personal benefit, the execution of which was intrusted to Williams. In such a case, both upon reason and authority, Williams' two associates must be held liable for his fraud in the accomplishment of their joint design, notwithstanding their personal ignorance of his tortious conduct in the premises. Hambleton v. Rhind, 84 Md. 456,36 A. 597, 40 L.R.A. 216; Lane v. Fenn, 65 Misc. Rep. 336,120 N.Y.S. 237; 33 Corp. Jur. 873, § 102. Our conclusion is that the affirmative charge was properly refused also to the defendant Preston.

There is no merit in defendants' contention that their rejoinder to plaintiff's replication to the plea of limitation was conclusively established by the evidence. The mere opinion of an attorney to whom plaintiff casually mentioned her first purchase of stock that it was worthless, without any statement by him of facts or reasons therefor, did not amount to knowledge or notice of the falsity of the representations made to plaintiff by the defendants. Certainly, they cannot with propriety contend that plaintiff was bound, as a matter of law, to accept the attorney's unfavorable opinion, and to discredit the specific statements of fact made to her by these defendants, whom she knew to be well-informed, and upon whose business character and judgment she strongly relied. Moreover, according to plaintiff's testimony, half of the stock had already been purchased before the opinion was given to her.

For the errors noted above, the judgment will be reversed and the cause remanded for another trial.

Reversed and remanded.

All the Justices concur.