Harvey v. Oettinger, 194 N.C. 483 (1927)

Nov. 9, 1927 · Supreme Court of North Carolina

194 N.C. 483

C. F. HARVEY v. C. OETTINGER et al.

(Filed 9 November, 1927.)

1. Equity — Contribution—Bills and Notes — Endorsement.

Where one of several endorsers on a note has been legally required to pay, and does pay the same, he is entitled to contribution from the other endorsers under the principle that equality is equity, among those standing in the same situation.

2. Bills and Notes — Negotiable Instruments — Corporations—Contribution —Endorsers—Equity—Receivers—Parties.

Where one of the endorsers of a note of a corporation taking over the business of another has been legally required to pay the note, and sues his coendorsers for contribution, and the answer alleges that the plaintiff had knowingly and fraudulently concealed the financial condition of the purchased corporation, and that he had failed under his agreement to properly attend to the financing of the purchasing corporation, and that the defendant’s endorsement was thus procured by the plaintiff’s fraud: SelA, a sufficient defense is alleged to raise the issue for the jury, and overthrow the plaintiff’s demurrer; and the position is untenable that the receiver of the corporation making the note and since declared insolvent can only maintain the action in his representative capacity.

Connor, J., dissenting.

Appeal by defendants, H. E. Moseley, L. L. Oettinger, F. 0. Dunn and Mrs. Myrtie A. Tull, executrix, from Sinclair, J., at May Term, 1927, of LeNOie.

Civil action for contribution. Plaintiff and defendants, being stock-Folders in tbe Kinston Knitting Company, endorsed for accommodation, certain notes of said company, wbicb were paid by plaintiff after default on tbe part of tbe principal and demand for payment refused by eacb of tbe defendants, coendorsers witb plaintiff. Plaintiff sues for contribution.

Tbe defendants, H. E. Moseley, L. L. Oettinger, F. 0. Dunn and Mrs. Myrtie A. Tull, executrix of tbe estate of Henry Tull, deceased, demurred ore tenus to tbe complaint, but tbis was overruled. Tbey tben answered, setting out in detail tbe circumstances under wbicb tbe transactions occurred, and alleging tbat tbe defendants were induced to endorse tbe notes in question under a misapprehension of tbe facts and because of tbe plaintiff’s promise “to take charge of and manage all tbe affairs of the’Kinston Knitting Company, and by express agreement to see tbat it was supplied witb credit in order to carry on its operations,” wbicb said promise and agreement tbe plaintiff wrongfully, wilfully and negligently refused to carry out; and further, it is alleged, tbat at tbe time of tbe endorsement of said notes tbe plaintiff wrongfully and in violation of tbe duty wbicb be owed to tbe defendants, withheld from them material and important facts bearing upon tbe condition of tbe Orion Knitting Mills, wbicb tbe Kinston Knitting Company was organized to take over, and that tbe suppression of such facts amounted to a legal fraud upon tbe rights of tbe defendants. This alleged wrongful and fraudulent conduct of plaintiff is pleaded in bar of bis right to recover in tbe present action.

Tbe trial court, being of opinion that tbe matters set up by tbe answering defendants were not sufficient to defeat a recovery, rendered judgment in favor of tbe plaintiff on tbe pleadings. Tbe answering defendants appeal, assigning errors.

Cowper, WhitcJcer & Allen'and Connor & Hill for plaintiff.

Bouse & Bouse for defendants.

Staoy, C. J.,

after stating tbe case: Tbe demurrer, interposed by tbe appealing defendants was properly overruled. But from a careful perusal of tbe record, we are convinced that issuable matters have been set up by tbe answering defendants in their pleadings, and that appropriate issues should be submitted to a jury for a proper determination of tbe controversy. Barnes v. Trust Co., ante, 371.

If tbe answering defendants have evidence to support tbe allegation that they endorsed tbe notes in question under a misapprehension of tbe facts, caused by a wrongful suppression of information on tbe part of tbe plaintiff, this would carry tbe case to tbe jury. Contribution arises out of tbe principle that “equality is equity” among those standing in tbe same situation. Moore v. Moore, 11 N. C., 358. Tbe defendants, by their allegations, deny that they stand in tbe same legal position with tbe plaintiff.

Again, equity will not aid tbe plaintiff, if tbe losses in question, as alleged by tbe defendants, were occasioned by bis own wrongful act in wilfully refusing to carry out bis promise to finance tbe corporation, and such promise was a material inducement to tbe defendants to endorse tbe notes of tbe Kinston Knitting Company. But this is only an allegation, and it is denied. Tbe truth of tbe matter can be determined by a jury.

We do not regard tbe principle announced in Douglass v. Dawson, 190 N. C., 458, with respect to tbe right of tbe receiver of an insolvent corporation to maintain an action for a wrong done tbe corporation as distinguished from tbe right of a creditor to maintain an action for a wrong done to him personally, controlling on tbe facts of tbe present record. Tbe action is for contribution, wbicb could arise only upon payment by tbe plaintiff, and tbis seems to bave been made after tbe appointment of tbe receiver. 6 R. C. L., 1036; 13 C. J., 821. But however tbis may be, tbe defendants plead personal losses directly induced by plaintiff’s alleged wrongs, irrespective of tbe injuries alleged to bave been sustained by tbe corporation. These allegations, if sustained, would seem to be sufficient at least to defeat plaintiff’s action for contribution.

There was error in rendering judgment on tbe pleadings as against tbe answering defendants.

Error.

CoNNOR, J.,

dissenting: No answer was filed to tbe verified complaint in tbis action by either of tbe defendants, C. Oettinger, T. Y. Moseley or E. M. Taylor. Tbe defendants, L. L. Oettinger, H. E. Moseley and F. 0. Dunn filed a joint answer to tbe complaint in which they admit tbe material allegations upon which plaintiff prays judgment against all tbe defendants. In their answer they allege facts which they contend constitute a defense to plaintiff’s action. Tbe defendant, Mrs. Myrtie A. Tull, executrix of Henry Tull, deceased, formally adopted tbe answer of her codefendants as her answer to tbe complaint. Plaintiff filed a reply to tbe answer in which be denied tbe allegations of tbe answer upon which tbe answering defendants rely to defeat plaintiff’s recovery. These answering defendants, other than Mrs. Myrtie A. Tull, executrix, filed a rebutter to tbe reply, in which they admitted tbe material facts set out in- tbe reply, and reiterate tbe allegations of their answer.

Upon tbis state of tbe pleadings plaintiff moved for judgment by default final against defendants, 0. Oettinger, T. Y. Moseley and F. M. Taylor, for want of an answer, and against tbe answering defendants for that no facts are alleged in their pleadings, which constitute a defense to plaintiff’s cause of action as set out in bis complaint.

Tbis motion was allowed, and judgment was rendered accordingly that plaintiff recover of all tbe defendants tbe sum of $96,168.53, tbis being seven-eighths of tbe total amount paid by plaintiff in discharge of tbe notes set out in tbe complaint, upon which plaintiff and defendants were jointly liable as sureties and which plaintiff bad paid, upon demand of tbe holders of tbe notes, after their maturity, and after default by tbe maker, who bad become insolvent. Provision is made in tbe judgment that tbe cause be retained, in order that if it shall hereafter appear that any of tbe defendants is insolvent, and for that reason plaintiff is unable to collect by execution .the amount for which such defendant is liable by reason of tbe judgment, such other orders and judgments may be made and rendered herein as may be necessary and proper for the protection of the rights of plaintiff and of the defendants and each of them to the end that proper contribution may be had from all the defendants.

To this judgment the answering defendants excepted. They only have appealed from the judgment to this Court. Their codefendants, who filed no answer, make no complaint of the judgment. As to them the judgment is final.

In the court below the answering defendants demurred ore tenus to the complaint, for that the complaint does not state facts sufficient to constitute a cause of action. This demurrer was overruled and said defendants excepted. Their first assignment of error is based upon this exception. I concur in the opinion of the Court that this assignment of error cannot be sustained.

Plaintiff and defendants were stockholders of the Kinston Knitting Mills, a corporation engaged in business in the city of Kinston, N. C. They had endorsed various notes, aggregating a large amount, executed by the corporation, for money borrowed to enable the corporation to carry on its business. They were each and all interested in the success of the corporation as stockholders. It is not denied that as such endorsers, by special agreement, they were liable as sureties on the notes, without priority, the one over the other. Lancaster v. Stanfield, 191 N. C., 340; Dillard v. Mercantile Co., 190 N. C., 225; Gillam v. Walker, 189 N. C., 189.

These notes had been renewed from time to time. On 27 February, 1927, at a meeting of the board of directors of the said corporation, consisting of plaintiff, C. E. Harvey, and of defendants, C. Oettinger, L. L. Oettinger, E. M. Taylor, T. V. Moseley, H. E. Moseley, and C. E. Dunn, a resolution was adopted, reciting that the corporation “notwithstanding the best efforts and judgment of its officials and directors,” was unable to meet its indebtedness, and directing that the officers of the corporation take steps at once to have a receiver appointed for the corporation. Thereafter a receiver was appointed, and the holders of the notes, which were endorsed by plaintiff and defendants, called upon the said endorsers' to pay said notes. Defendants failed to pay said notes, or any part of same; plaintiff thereupon paid the notes, and has brought this action against defendants, his cosureties, for contribution.

The appellants resist recovery by plaintiff upon their allegation that the corporation was rendered insolvent, and thereby unable to pay its indebtedness, including said notes, by the wrongful conduct of plaintiff, its president (1) in that plaintiff, in breach of his duties as president, absented himself from his office, for four months, during which time be was traveling in Europe, and (2) in that plaintiff, in breach of his duties as president, failed to procure further extensions of the notes upon which he and defendants were liable as sureties. Defendants allege that they endorsed said notes, and thereby became liable as sureties, upon their assurance that plaintiff would faithfully perform his duties as president, and would use his personal credit to procure extension of said notes. All of the defendants, except Mrs. Myrtie A. Tull, executrix, were directors of the corporation; defendant E. 0. Dunn was first vice-president, and defendant H. E. Moseley second vice-president of the corporation.

I am of the opinion that if all the facts alleged in the answer and rebutter of the answering defendants be established, such facts do not constitute a cause of action upon which these defendants could recover of plaintiff, and that they therefore do not constitute any defense to this action in behalf of these appellants. The cause of action, if any, arising upon the facts alleged in the answer and rebutter can be maintained only by the corporation or by the receiver. The damages, if anyj resulting from the breach of his duti,es by plaintiff, as president of the corporation, are assets of the corporation, and should be administered for the benefit of the corporation, its creditors and all its stockholders. I think the law as stated in Douglass v. Dawson, 190 N. C., 458, is applicable to these facts. This case does not, in my opinion, fall within the principle of Bane v. Powell, 192 N. C., 387. The distinction between these two cases has been clearly stated in the recent opinion of this Court in Wall v. Howard, ante, 310. These cases deal with actions against directors of insolvent banks, but the principles of law upon-which they were decided are applicable to actions involving the conduct of officers and directors of corporations other than banks.

The result of this decision, it seems to me, is that three out of seven directors of the Kinston Emitting Mills are permitted to set up as a defense to a cause of action, upon which they are personally liable, facts which constitute a cause of action, upon which the corporation or its receiver alone is entitled to recover. Defendants who filed no answer- and against whom a final judgment has been rendered in this action, upon the facts alleged are as much entitled to maintain this defense as the answering defendants. Neither of them is so entitled, in my opinion; only the corporation which has sustained damages by reason of the wrongful acts of plaintiff, its president, or its receiver, may maintain an action upon the facts relied upon by these defendants. I do not think that their pleadings can be justly construed as alleging any contract or agreement by the plaintiff with these defendants, as individuals. Plaintiff as president owed certain duties to the corporation; for damages resulting from a breach of these duties, if any, he is manifestly liable only to the corporation. The general allegations that plaintiff agreed to finance the corporation, by means of his personal credit — without regard to any limit as to amount or as to time, or as to conditions that might arise in the future, and that he failed to comply with this agreement, are not sufficient, in my opinion, to give rise to a cause of action in behalf of the defendants against him, or to constitute a defense to his action against them for contribution. He cannot be held liable to them, either in law or in equity upon these allegations.

Defendants, who are officers and directors of the corporation, owed a duty to the corporation, its stockholders and creditors, with respect to the matters upon which they rely for defense in this action which is brought against them as individuals. They allege that for four months the plaintiff, as president, failed to perform his official duties, and that the corporation thereby suffered damages. It does not seem that they ought to be permitted, in law or in equity, to set up as a defense in this action the breach by the plaintiff of his duties as president when necessarily it appears that they knew, of such breach and took no steps to prevent it.

I cannot concur in the decision made by the. Court of the question presented by this appeal. In my opinion there is no error in the judgment of the Superior Court, and it should be affirmed.