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QUINN v. FORSYTH.
42796.
Action for damages; fraud and deceit. DeKalb Superior Court. Before Judge Peeler.
QUILLIAN, Judge.
1. In the second count of the petition the plaintiff seeks to pierce an alleged sham transaction and to recover his interest in certain stock which he alleges he was wrongfully deprived of by the fraudulent misrepresentations of the defendant and the plaintiff's wife acting in concert.
2. The petition contained sufficient allegations of fraud to withstand a general demurrer.
3. The plaintiff acted in a diligent manner and although he ratified the sale this was accomplished by the misrepresentations made to him by the defendant.
4. The petition having been brought within 4 years of the time when the fraud was discovered, or could have been discovered, by the exercise of ordinary and reasonable diligence, it was not barred by the statute of limitation.
G. E. Quinn brought this action in DeKalb Superior Court against A. H. Forsyth, a director of the Woodman Company, Inc., for fraud and deceit resulting from the defendant's alleged fraudulent acquisition of the plaintiff's stock in the Woodman Company. The petition as amended was in 2 counts, containing in part the following allegations. .
Count 1 alleged that the plaintiff owned an undivided 1/2 interest in certain described shares of stock in the Woodman Company; that the stock certificates were issued to the plaintiff and his wife jointly with each of their names appearing on the certificates as owners of the stock shares; that prior to July 10, 1960, the other undivided 1/2 interest was owned by the plaintiff's wife from whom he was divorced on November 13, 1961; that during 1960 and 1961 the defendant, the brother of the plaintiff's wife, was executive vice president, secretary and director of the Woodman Company and a majority stockholder therein; that during the first part of November 1961 the defendant represented to the plaintiff that his wife had sold to the defendant not only her 1/2 interest, but all of the plaintiff's interest, in the stock; that prior to November 13, 1961, the plaintiff had not authorized the sale of his interest in the stock, had no knowledge of the sale nor had he ratified or approved it; that the plaintiff had never endorsed the stock certificates or delivered the same to the defendant or otherwise authorized anyone to do this for him.
It was further alleged in Count 1 that the defendant represented he paid the plaintiff's wife $3,169; that, during the latter part of October and the early part of November 1961, the defendant discussed with the plaintiff his desire to perfect the sale; in order to accomplish this, on November 13, 1961, the defendant fraudulently induced the plaintiff to execute a separate written assignment of the stock to his wife and to accept 1/2 the purchase price the defendant had allegedly paid for the stock; the defendant induced plaintiff by making wilful and material misrepresentations which the defendant knew to be untrue and by concealing many material facts known to the defendant which the defendant had a duty to disclose and of which he knew the plaintiff was ignorant. The defendant represented that the plaintiff's interest in the stock was not worth any more than $1,584.50; that there had been no change in the financial condition of the corporation which was in its usual poor financial condition; that the prospects of an improved financial condition were not good. Answering the plaintiff's question whether he still owned a 1/2 interest in the same shares of common stock the defendant acknowledged that but for the sale of the stock to him by the plaintiff's wife he would still own the same shares. All of these representations were wilfully made by the defendant.
On September 18, 1961, at a specially called stockholders' meeting, of which no notice was sent to the plaintiff, an amendment to the corporate charter was approved by which the Woodman Company went "public," receiving approval of the Securities & Exchange Commission to sell 100,000 shares of reclassified stock; that records filed with the Securities & Exchange Commission showed the defendant as owner of the stock in question; that the stock was sold for $3 a share. The petition alleged that while representing to the plaintiff that the financial condition and the prospects of the company were poor, the defendant knew the corporation had been successful in developing an overseas market which would tremendously increase its sales and account for at least 40% of its total sales; that the development of this market with the United Kingdom and Europe was a material factor in the financial success of the company.
The defendant, as the corporate secretary, had the duty to give stockholders notice of specially called meetings but in order to conceal the true facts regarding the reclassification of the plaintiff's stock prevented any notice of the meeting being given to the plaintiff. Plaintiff was damaged in the amount of $38,745.50, the difference between the value represented and price paid by the defendant and the true value of the stock on November 13, 1961. In December 1964, approximately 265,000 shares of Woodman Company stock were sold; included as a part of this transaction the defendant sold the plaintiff's stock and received $50,000 for the plaintiff's interest. The plaintiff had no knowledge of any of the foregoing facts until about this time with the Securities & Exchange Commission and ascertained the when he learned of the sale, subsequently inspected the filings true facts. The defendant's actual fraud prevented the plaintiff from learning the true facts prior to this time.
The second count of the petition incorporated all the averments of the first count and also included the following allegations: That the defendant's acquisition of the stock on November 13, 1961, "was part of a fraudulent scheme and plan formulated by the defendant and being aided and abetted therein by" the plaintiff's wife prior to July 10, 1960; that the fraudulent scheme was for the defendant to acquire the plaintiff's interest in the stock by obtaining an unauthorized transfer thereof, and then obtaining the plaintiff's consent to the transfer. In furtherance of this plan the defendant claimed that a sale of the entire interest in the stock took place on July 10, 1960, for a purchase price of $3,169. However, the defendant did not purchase the plaintiff's wife's interest in the stock for the price stated, and instead on February 5, 1965, paid her $50,000 out of the proceeds of the stock sale of December 1964; thus, the defendant did not pay $3,169 for the stock but went through a ruse and fraudulent transaction to make it appear that he was paying this amount in order to mislead the plaintiff. Upon being informed of the sale about July 20, 1960, the plaintiff contacted the defendant and notified him that the sale of his interest was unauthorized. The defendant represented to the plaintiff that the legal significance of the stock being listed in the names of the plaintiff and/or his wife authorized either one to transfer the shares without the approval of the other; he stated he paid his sister more than the stock was worth and certainly would not cheat her.
The plaintiff requested that he be allowed to see the corporate records but was refused by the defendant and later by the president of the corporation. From July 20, 1960, until November 13, 1961, the plaintiff repeatedly sought to review the corporate records but his request was refused by the defendant; when he went to the corporate premises the receptionist would not let him see any officer of the corporation. During this time the plaintiff continually contended the sale was unauthorized but since he was recovering from a heart attack and trying to effect a reconciliation with his wife, he deemed it unwise to institute a lawsuit to rescind the sale. The plaintiff, in ignorance of the true facts and in reliance upon the valuation of the alleged bona fide sale price, executed a separate written assignment of the stock to his wife, thereby perfecting the defendant's title.
The petition prayed for damages in the amount of $38,745.50, punitive damages in the amount of $15,000 and that the defendant account to the plaintiff for dividends, bonuses and profits he had derived as a result of his breach of trust.
To the petition as amended the defendant filed his general demurrers on the grounds that each count of the petition set forth no cause of action and that each count shows on its face that the purported cause of action is barred by the statute of limitation. The trial judge sustained the defendant's renewed general demurrers to both counts of the petition. From this adverse judgment the plaintiff appeals.
1. Since the major issues of this case are centrally focused on Count 2, we consider it first. The count contains allegations that the stock certificates were listed in the plaintiff's name "and/or" his wife's. The appellee therefore argues that the legal effect of the instrument was that either the plaintiff or his wife, by his or her single endorsement, could transfer the stock. Thus, he reasons, a valid sale of the stock occurred on July 10, 1960, and subsequent events would be of no consequence.
Assuming arguendo that "and/or" would authorize either the plaintiff or his wife to effectuate a valid conveyance of the stock, under the allegations of the second count this factor alone would not be controlling. In Nash v. Martin, 90 Ga. App. 235 (1) (82 SE2d 658), this court held: "Code 13-2039, providing in substance that, when a bank deposit is made payable to either of two named persons or the survivor, such deposit may be paid to either of said persons whether the other is living or not, and the receipt of the person so paid shall be a valid and sufficient release and discharge to the bank for the payment made, has reference only to the liability of the bank as to such deposit, and does not affect the right to the property as between the parties. Clark v. Bridges, 163 Ga. 542, 546 (136 SE 444)." (Emphasis supplied.) In this analogous situation, even though one of the two joint owners might transfer the stock, that would by no means cut off the other's right to share in the proceeds. Moreover, a fraudulent scheme or conspiracy is alleged and under the averments the defendant was in no sense a bona fide purchaser. Instead, the defendant and the plaintiff's now former wife are alleged to be co conspirators in a scheme or plan, through fraud and deceit, whereby they acquired the plaintiff's interest in the stock at a mere fraction of its actual value. As such they are joint tortfeasors who, as in this case, may be sued severally. Nobles v. Webb, 197 Ga. 242, 245 (29 SE2d 158); Peoples Loan Co. v. Allen, 199 Ga. 537, 558 (34 SE2d 811); Cook v. Robinson, 216 Ga. 328 (116 SE2d 742); Nottingham v. Wrigley, 221 Ga. 386, 388 (144 SE2d 749). The plaintiff is seeking to pierce an alleged sham transaction and recover his rightful interest in the stock which he alleges he was wrongfully deprived of by the efforts of the defendant and the plaintiff's wife acting in concert. See in this connection Wilson v. Appalachian Oak Flooring &c. Co., 220 Ga. 599, 608 (140 SE2d 830). Hence, it is apparent that, regardless of what was necessary to accomplish a stock transfer in ordinary circumstances, the gravamen of the instant suit, in essence, rests on the plaintiff's right to assert his interest against the coholder of the stock and the one to whom she fraudulently transferred it, the defendant here. This is evident because the plaintiff, as a joint owner of the stock, was entitled to his share of the true proceeds of the sale.
2. Of course, what is said above naturally presupposes that there are sufficient allegations of fraud, which vital question we must now determine. Here it is alleged that, in furtherance of the conspiracy and in order to obtain the plaintiff's consent to the sale and thereby acquire his interest in the stock and the proceeds thereof, the following misrepresentations were made by the defendant: that the stock was worth no more than $1,585.50; that there was no change in the usual poor financial condition of the corporation; that prospects of improvement were not good; that, all the while, the defendant knew the corporation had reclassified its stock, gone "public" and had been successful in developing an overseas market. It was further alleged that in order to conceal the true facts, the defendant prevented any notice being given to the plaintiff of a specially called stockholders' meeting; that the defendant refused to allow the plaintiff to see the corporate books and later represented that the corporation's condition had not changed, when in fact it had.
Appellee argues that these allegations amount to mere expressions of opinion which can not form the basis of fraud. Dortic v. Dugas, 55 Ga. 484 (3); Watkins v. Mertz, 83 Ga. App. 115 (62 SE2d 744). While acknowledging this general precept we also recognize that in Georgia the rule is that: while a corporate director does not hold title and is not a strict trustee, "he does occupy a fiduciary relation to the stockholders with reference to their shares of stock, and this relationship obtains when such director is dealing with an individual stockholder in the purchase of such stockholder's shares." Manning v. Wills, 193 Ga. 82, 89 (17 SE2d 261), citing Oliver v. Oliver, 118 Ga. 362 (4) (45 SE 232); Swann v. Wright, 180 Ga. 323, 326 (3) (179 SE 86). We hold that, in context, the allegations show material misrepresentations of fact, not mere opinions, and a failure to disclose pertinent and vital information which the shareholder was entitled to receive from one in a fiduciary relation to him.
A further argument is advanced that the petition fails to affirmatively reveal that the plaintiff's action was induced by a reliance upon misrepresentations made at that particular time. While on demurrer the allegations of the petition are construed most strongly against the pleader, this does not mean the pleadings are to be given an unnatural or strained construction in violation of their reasonable and necessary intendment. Raines v. Jones, 96 Ga. App. 412 (100 SE2d 157); New Cigar Co. v. The Broken Spur, 103 Ga. App. 395 (119 SE2d 133); Georgia Power Co. v. Leonard, 187 Ga. 608, 614 (4) (1 SE2d 579). Viewed as a whole there is no reasonable inference but that the plaintiff was misled by past, by re-affirmance of past and by present misrepresentations. In this connection we note the following allegation: "On November 13, 1961, he sold to the defendant his one-half interest in said stock for $1,584.50, in reliance on said past representations and in reliance upon the defendant's further representation that the condition of the corporation had not changed since the petitioner and the defendant had last talked." This is subject to no other construction than that the misrepresentation took place on the date the plaintiff executed the written assignment of stock.
3. The defendant contends that under the Uniform Stock Transfer Act, Ga. L. 1939, p. 384 (now repealed but then in effect), the plaintiff's failure to repudiate the sale during the period from July 10, 1960, to November 13, 1961, amounted to a ratification of the sale. The Act reads: "If the endorsement or delivery of a certificate, (a) was procured by fraud or duress, or . . . (c) without authority from the owner, . . . the possession of the certificate may be reclaimed and the transfer thereof rescinded, unless: . . . (2) The injured person has elected to waive the injury or has been guilty of laches in endeavoring to enforce his rights." Ga. L. 1939, pp. 384, 387, 7.
As is apparent from the language of the Georgia cases a stockholder may not blindly rely on the director's representations. However, here it was alleged that the plaintiff did make reasonable effort to ascertain the facts by repeatedly seeking to see the records and being refused in each instance, and there is, of course, no requirement of exhaustive investigation. Whether this constituted due care to ascertain the true facts would be a jury question. Norris v. Hart, 74 Ga. App. 444, 446 (40 SE2d 96); Dorsey v. Green, 202 Ga. 655, 659 (44 SE2d 377).
If, under the provisions of the Uniform Stock Transfer Act, an automatic ratification of the sale might occur as a result of the plaintiff's inaction or laches; yet, after the passage of the described time, the plaintiff, of course, did ratify the sale but only while laboring under the effect of the defendant's fraudulent misrepresentations. Any earlier ratification by operation of the Uniform Stock Transfer Act still resulted from those same misrepresentations. The plaintiff would not be precluded from asserting his rights by acquiescing in a sale, which acquiescence was induced by fraud.
Count 2 was not subject to general demurrer.
4. The defendant's demurrer raises the question whether the plaintiff was barred by the statute of limitation. Code 3-807 provides: "If the defendant, or those under whom he claims, shall have been guilty of a fraud by which the plaintiff shall have been debarred or deterred from his action, the period of limitation shall run only from the time of the discovery of the fraud." The petition alleges that the plaintiff was prevented by the defendant from ascertaining the truth until December 23, 1964; but, in any case, at best the plaintiff could not have discovered the true situation until after November 13, 1961, and the suit was brought October 28, 1965, within 4 years of that time as required by law. Code 3-1002; Frost v. Arnaud, 144 Ga. 26 (85 SE 1028). There is no merit in this ground of demurrer.
5. Most of what is here held relative to Count 2 is applicable to Count 1. However, one further ruling applicable only to Count 1 is here made.
Count 1 alleges that the stock was owned jointly by the plaintiff and his wife and contains nothing to indicate the shares could be transferred by either, individually. Under the provisions of the Uniform Stock Transfer Act, in order to transfer title to the stock the plaintiff as joint owner, must have (1) endorsed the stock certificate, (2) executed a written assignment of the stock or (3) a power of attorney to sell, assign or transfer the stock. Ga. L. 1939, pp. 384, 385, 391, 1 and 22. Under the averments of Count 1 the defendant would have been without clear title to the plaintiff's interest in the stock until the assignment of November 13, 1961. Without question, the purpose of the scheme alleged in Count 1 was to obtain title from the plaintiff and the misrepresentations, the allegations of which we have already found to be sufficient, were calculated to achieve that aim. For this additional and distinct reason, Count 1 was not subject to general demurrer.
The trial judge erred in sustaining the general demurrers to Counts 1 and 2 of the petition.
Judgment reversed. Jordan, P. J., and Deen, J., concur.
Hatcher, Meyerson, Oxford & Irvin, Henry M. Hatcher, Jr., for appellee.
Grant, Spears & Duckworth, William H. Duckworth, Jr., for appellant.
SUBMITTED MAY 4, 1967 -- DECIDED SEPTEMBER 8, 1967 -- REHEARING DENIED NOVEMBER 3, 1967 -- CERT. APPLIED FOR.
Friday May 22 19:35 EDT


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