Hood ex rel. Bank of Pender v. Paddison, 206 N.C. 631 (1934)

June 20, 1934 · Supreme Court of North Carolina

206 N.C. 631

GURNEY P. HOOD, Commissioner of Banks, ex rel. THE BANK OF PENDER; L. P. HARRELL, Liquidating Agent for the BANK OF PENDER, and JULIAN HAMILTON, Assistant Liquidating Agent for the BANK OF PENDER, v. GEORGE L. PADDISON.

(Filed 20 June, 1934.)

1. Banks and Banking H a — Fraudulent misrepresentations of president, inducing purchase of stock from bank held defense to statutory liability.

In proceedings after the insolvency of a bank to enforce the statutory liability against an owner of its stock the stockholder alleged that he purchased the stock from the bank and that he relied upon and was induced to make the purchase by reason of the fraudulent misrepresentations of the president of the bank as to the bank’s financial condition, that he had no means of determining the truth or falsity of the president’s statements, and that he did not discover their falsity until after the bank was placed in the statutory receiver’s hands. Held, the president of the bank had authority to make the contract for the bank for the sale of the stock, and the allegations were sufficient to constitute a defense to defendant’s statutory liability, and judgment on the xileadings against defendant is erroneous.

2. Limitation of Actions B b — Statute does not run until fraud is discovered or should have been discovered by due diligence.

In this proceeding against defendant to enforce the statutory liability on bank stock owned by him, defendant alleged that he purchased the stock from the bank and was induced to make the purchase by the false and fraudulent misrepresentations of the bank’s president. Held, whether the defense was barred by the statute of limitations under the facts of the case, N. C. Code, 441(9) is held for the jury, the statute beginning to run only from the discovery of the fraud or when it should have been discovered in the exercise of ordinary care.

Connob, X, dissents.

Schenck, X, took no part in the consideration or decision of this case.

Appeal by defendant from Oranmer, J., at October Term, 1933, of PeNdek.

Reversed.

Tbe facts as alleged by defendant are to' the effect that the defendant, George L. Paddison, is a native of North Carolina, but a citizen of Montana, and lives without the State. He visits relatives and friends at Burgaw, North Carolina, periodically. For many years prior to 1928, and from that date until the Bank of Pender closed, George L. Paddison had on deposit with the Bank of Pender, Burgaw, North Carolina, $1,534.25. On 29 December, 1928, O. C. Branch, president of the Bank of Pender, approached the defendant and stated that the bank owned fourteen (14) shares of its own stock, and asked the defendant to purchase the same, stating, in response to questions by the defendant, that the bank was making more than sufficient money to pay a twelve per cent dividend annually, that the bank was in first-class condition and the book value of the stock was more than two to one, that the bank had no bad paper, only a few slow loans amounting to a few hundred dollars which were collectible, that all loans were adequately secured or endorsed, that the value of the securities had not depreciated below the amount of the loans, that the bank owned no real estate other than the banking house, that the investments of the bank, were worth par or better, and that the bank had suffered no losses. These representations were untrue, but believing them to be true and relying upon them, the defendant purchased the fourteen (14) shares of stock, and they were transferred to him on 28 January, 1929. The defendant contended that he had no way to determine the truthfulness of these statements other than the statements made to him by the president of the bank, and relied and acted upon them. The Bank of Pender closed on 7 January, 1932. The defendant returned to North Carolina in August, 1932, and then discovered for the first time that the representations which had been made to him were false and untrue at the time they were made, and are now false and untrue. The defendant was served with summons in tbis action during bis visit, and filed tbe answer set out in tbe record of tbis case.

Tbe defendant tendered tbe following issues: “(1) Was tbe sale of fourteen shares of stock to tbe defendant, George L. Paddison, procured by tbe false and fraudulent representations of C. C. Branch, president of tbe Bank of Pender, acting for said bank? Answer: . (2) If so, did tbe defendant afterwards exercise due care and diligence in discovering tbe fraud and repudiating tbe contract of purchase ? Answer :.” To tbe submission of tbe foregoing issues, tbe plaintiffs objected and moved tbe court for judgment on tbe pleadings and admissions. Tbe court declined to submit said issues and tbe defendant excepted and assigned error. On motion of tbe plaintiffs for judgment, tbe court ruled that tbe defense set up by tbe defendant, alleging that be was induced to purchase said stock through tbe fraudulent misrepresentations of tbe president of tbe bank was not available in tbis action and sustained tbe plaintiffs’ motion, and tbe defendant excepted and assigned error.

Tbe judgment of tbe court below is as follows: “Tbis cause coming on for bearing before bis Honor, E. H. Oranmer, judge bolding courts in tbe Eighth Judicial District, and a jury; upon tbe reading of tbe pleadings and submission of tbe issues, the defendant having admitted at tbe time of tbe transfer of tbe fourteen shares of stock by tbe defendant, George L. Paddison, to Hugh Overstreet, Jr., referred to in tbe pleadings, that Hugh Overstreet, Jr., was at said time, and at tbe time of tbe institution of tbis suit, a minor under tbe age of twenty-one years, and tbe court being of tbe opinion, and so bolding as a matter of law, that such transfer of said stock did not relieve tbe defendant of bis liability and that tbe defense of fraud, as pleaded by tbe defendant, is not available to him as a defense in tbis cause, and so bolding as a matter of law: It is, therefore, upon motion of R. G. Johnson and Helium & Humphrey, plaintiffs’ attorneys, considered, ordered, adjudged and decreed that judgment be, and tbe same is, hereby rendered in favor of tbe plaintiffs and against tbe defendant in tbe sum of $1,400, with interest thereon at tbe rate of six per centum per annum from 6 January, 1932, until paid. It further appearing to tbe court that at tbe time of tbe institution of tbis suit, a warrant of attachment issued out of tbis court and that tbe sheriff of Pender County attached tbe lands described in the warrant of attachment of record and tbe deposit in tbe name of said defendant, as in said warrant of attachment set out, and also at which time, an attachment bond of record was executed by tbe plaintiffs. It is further adjudged and decreed that tbe attachment bond executed for and on behalf of tbe plaintiffs be discharged; that said lands and said deposit account be, and tbe same are hereby condemned to be sold by C. D. Humphrey, who is appointed a commissioner of tbis court to sell said lands, or so mneb thereof as may be necessary, to satisfy tbe judgment herein rendered, after due advertisement as provided by law, wlm shall credit tbe net proceeds arising from such sale, or such amount thereof as may be necessary, on account of tbe judgment herein rendered in favor of tbe plaintiffs to pay said judgment in full, and report all of bis acts and doings to tbis court. It is further ordered, adjudged and decreed that all dividends arising from said deposit account shall be credited on account of said judgment, unless and until said judgment is paid in full; and that judgment is rendered against the defendant for the costs of this action, to be taxed by the clerk of this court, such costs to be paid from the proceeds from said deposit or the sale of said lands, including the costs of the sale of said lands, before crediting any amount on the judgment herein rendered.”

Tbe defendant also excepted and assigned error to tbe judgment as signed and appealed to the Supreme Court.

R. G. Johnson and Xellum & Humphrey for plaintiffs,

Clifton L. Moore and J. 0. Carr for defendant.

ClasksoN, J.

The question involved: May tbe defendant, alleged owner of capital stock in a defunct State bank, in an action by tbe Commissioner of Banks to recover of the defendant the amount of his statutory liability as such stockholder, avail himself of tbe defense that he was induced to purchase said stock by the false and fraudulent representations of the condition of the bank by its president? We think, under the facts and circumstances of this case, that there was sufficient competent facts alleged by defendant on the record, to be submitted to the jury on the question involved.

The defendant, as a defense, alleged and set up actionable fraud on the part of tbe president of tbe bank, in the purchase of tbe stock. Whatever may be the English decisions and some of the American decisions, this Court has held that actionable fraud, if shown, is a good defense. In Chamberlain v. Trogden, 148 N. C., 139 (140-141), speaking to the subject, citing numerous authorities, is the following: “There is some conflict of authority as to the right of a subscriber to rescind his subscription or maintain a defense to his obligation therefor on the ground of fraud, after the corporation has become insolvent and its affairs have passed into the possession and control of a receiver or the bankruptcy court, or other method of general adjustment, primarily for the benefit of creditors. The English cases and some courts in this country have held that, under conditions indicated, it is no longer open to the subscriber to maintain such a defense. These English decisions, however, are said to be based to some extent on tbe construction given to certain legislation on tbe subject, and tbe weight of authority in tbis country seems to establish that, under exceptional circumstances, tbe subscriber may avail himself of tbe position suggested even after insolvency. . . . All- of tbe authorities, however, are to tbe effect that, in order to do so, tbe subscriber must act with promptness and due diligence, both in ascertaining tbe fraud and taking steps to repudiate bis obligation.” Tbe president of the bank bad authority to make tbe alleged contract. Warren v. Bottling Co., 204 N. C., 288 (290).

Tbis whole matter is thoroughly discussed in Hood v. Martin, 203 N. C., 620, citing tbe Chamberlain case, supra. Tbe period prescribed for tbe commencement of action, N. 0. Code, 1931 (Micbie), section 441, in part: “Within three years an action — (1) Upon a contract, obligation or liability arising out of a contract, express or implied, except those mentioned in tbe preceding sections. . . . (9) For relief on tbe ground of fraud or mistake; tbe cause of action shall not be deemed to have accrued until tbe discovery by tbe aggrieved party of the facts constituting tbe fraud or mistake.”

Tbe statute runs from tbe discovery of tbe fraud or when it should have been discovered in tbe exercise of ordinary care. In tbe present case, we think tbe facts on tbe record, sufficient to be submitted to tbe jury on tbe issues tendered by defendant.

Tbe question of tbe transfer of tbe stock to Hugh Overstreet,-Jr., a minor, is abandoned on tbis appeal by tbe defendant. See In re Trust Co., 203 N. C., 238; Early v. Richardson, 280 U. S., 496, found on page 658 of 69 A. L. R., annotation, in part, on page 684. For tbe reasons given, tbe judgment of tbe court below is

Reversed.

OoNNOR, J., dissents.

SoiieNCK, J., took no part in tbe consideration or decision of tbis case.