Summary
In Smith v. Kreuger, 71 N. J. Eq. 531, 536, 63 Atl. 850, 855 (Emery, V. C., 19061, the court, after referring to Eggers v. Anderson (which had been decided after Kreuger v. Armitage and before Smith v. Kreuger), exercised its discretion to retain jurisdiction because there were equitable features requiring treatment in a Court of Chancery.
Summary of this case from Kuntz v. TonneleOpinion
05-31-1906
SMITH v. KRUEGER. KRUEGER v. SMITH et al.
James M. Trimble and John R. Hardin, for Smith and Armitage. Joseph A. Beecher, for Krueger.
Bill by Isaiah Smith against Gottfried C. Krueger, and by said Krueger against said Smith and another. Causes heard together on bill, answer and cross-bill, replication, and proofs. Decree for complainant in the first suit, and bill in the second suit dismissed.
James M. Trimble and John R. Hardin, for Smith and Armitage. Joseph A. Beecher, for Krueger.
EMERY, V. C. These two causes now heard together are, first, a suit by Isaiah Smith against Gottfried C. Krueger, and, second, a suit on a bill filed by Krueger against Smith and John L. Armitage as codefendants. By stipulation, filed at the hearing of these two causes, the evidence taken in a previous cause brought by Krueger against Armitage alone is to be read and considered, so far as applicable, as if taken at this hearing. Smith's bill is filed to foreclose a mortgage on lands in Middlesex county, bearing date January 6, 1894, given by Krueger to Smith to secure the payment of $4,000 in one year, with interest payable semiannually, on which the principal, with interest from August 6, 1894, is due. Krueger's defense to the foreclosure suit is that the mortgage was obtained by false representations made by Smith to him for the purpose of securing it, and also that it was obtained by a fraudulent combination or conspiracy between Smith and Armitage. A cross-bill for cancellation of the mortgage is anexed to the answer. Krueger's bill, subsequently filed against Smith and also against Armitage (who was not a party to Smith's foreclosure suit), sets up substantially the same allegations of false representations against both Smith and Armitage, and claims that, by reason thereof, the mortgage should be declared void, and also that both Smith and Armitage are liable to repay to him the additional amount, $8,500, which he (Krueger) invested in the purchase of the stock of a mining company, by reason of their false representations in regard to the mine of the company, and their conspiracy to sell the stock to him by such representation. Krueger's former suit was brought against Armitage alone to recover from him the entire amount so invested, $12,500, which included the amount of the mortgage to Smith. This bill was dismissed without prejudice to an action at law, for the reasons given by me in Krueger v. Armitage (1899) 58 N. J. Eq. 357, 44 Atl. 167.
The mortgage now in question, although given by Krueger directly to Smith, was given in carrying out a contract made by Krueger, not with Smith, but either with Armitage or a mining company, called the International Asbestos Company, for the purchase of 500 shares of the stock of that company. The mortgage to Smith was accepted by the company as payment of so much cash to it by Krueger, on account of shares of its stock issued to Krueger. The company owed Armitage on a contract with him for the transfer of his stock to the company, to carry out its contract with Krueger, and Armitage on his part owed Smith, under circumstances to be hereafter stated, for the purchase price of the mine, which had been conveyed by Smith to Armitage, and by Armitage to the company. The mortgage made directly by Krueger to Smith was accepted by the company as Krueger's payments for $4,000 on account of the stock to be issued to him, and this amount was charged by the company to Armitage as a payment on account of stock transferred by Armitage to the company for the purpose of issuing to Krueger, and Smith on receiving the mortgage from Armitage, gave credit to Armitage for the amount. The false representations made are claimed to have been made in connection with Krueger's purchase of the stock. This purchase was negotiated between Armitage and Krueger, and Smith had no connection with this contract. As to Smith, Krueger's claim is based on the allegations (1) that before the delivery of the mortgage Smith made to Krueger false representations as to the mine, which induced him to give the mortgage, and (2) that the stock of the company for which the mortgage was given as a part payment, and which was part of the stock purchased by Krueger, was really Smith's stock, and that the sale of the stock to Krueger was in pursuance of a fraudulent combination or conspiracy between Smith and Armitage to defraud Krueger. On the second ground, Krueger by his cross-bill claims not only thecancellation of the mortgage, but a decree against both Smith and Armitage for the entire amount invested by him, about $12,500. The facts relating to the purchase of the stock and the giving of the mortgage may be summarized as follows: Complainant Smith in July, 1803, held the legal title to an asbestos mining property in the providence of Ontario, Canada, this title being by Smith in trust for a corporation of the province of Quebec, called the Sydenham Mica & Mining Company, in which Smith, Armitage, and three other persons were interested as stockholders. This property had cost them about $3,500 or $4,000; but the company was capitalized at $225,000, of which Smith owned $75,000, Lacey $75,000, and Armitage $60,000. This Sydenham company owned also mica mining property in another province of Canada, to which it held title in its own name. On or about July 2, 1893, the Sydenham company, by a written agreement of that date, executed by Smith as president and Lacey as secretary, agreed to sell the asbestos mining property to Armitage for the sum of $10,000 in cash and $10,000 in stock of the International Asbestos Mining & Manufacturing Company, a company to be organized by Armitage, the option to purchase to run for a year. On or about July 26, 1893, the International Asbestos Mining & Manufacturing Company was organized in New Jersey by Armitage and four other persons, not including, however, Smith or any person interested in the Sydenham company, except Armitage, with a capital stock of $200,000 (all to be paid in on commencing business), of which Armitage held 1,900 shares of $100 each, and each of the other four incorporators, ten shares. All of the shareholders were elected directors, and at the first meeting of the directors an assessment of 20 per cent. on the stock was ordered, and a resolution was adopted by the company to accept from Armitage in full payment of his subscription for 1,960 shares, the mining properties owned by him, described in the deed to Smith, and that the officers of the company deliver the 1,900 shares to Armitage upon the transfer to the company of the said mining properties, and that the stock should be declared and taken to be full paid and unassessable. On the same date (July 26, 1893), two certificates, one for 1,000, and one for 960 shares of full-paid stock, were issued to Armitage, but no transfer of the mining property was then made, nor did Armitage then have the title or anything but the option to purchase within a year. By an agreement of the same date (July 26, 1893), and made then or shortly afterward, Armitage agreed with the company, for $25,000, to transfer to the company, or to such person as the board of directors might appoint, 960 shares of full-paid stock of the company, as follows: for every $50 paid by the company, one share of stock, until the whole $25,000 was paid, and then to transfer the balance of the 960 shares, and the company agreed to pay the $25,000 in this manner. Apparently no working capital or cash was paid in to the company by the subscribers (except perhaps $1,000 as the 20 per cent. on the 40 shares), and apparently the only method of raising working capital was by the subsequent sale by the company of the paid-up shares which Armitage agreed to convey to the company for $50 per share. Soon after the organization of the asbestos company, and in August, 1893, an expert named Woltereck was employed to examine the mining property and report on it to the company. Armitage accompanied the expert to the mines and left him there. On August 24, 1893, the expert made a flattering report to the company of the property and its value, especially as to the quality of asbestos fibre, and this report was printed by the asbestos company for circulation, along with a prospectus in which Armitage's name appeared. From time to time during the fall, small lots of stock seem to have been sold, Armitage conveying to the company portions of his 960 shares for that purpose. On the 20th of October, 1893, Smith and his wife, for the nominal consideration of $1, conveyed to Armitage the mining property. Nothing was paid to Smith for this conveyance, and Armitage says that when it was delivered to him, he agreed with Smith that the money which was paid to him by the asbestos company he would pay to the mica company. This deed was recorded in Ontario, on December 29, 1893, and the title on the record to the mining property stood in Armitage until February 3, 1894, when there was recorded a deed from Armitage and his wife to the asbestos company, dated December 18, 1893, but executed on January 4, 1894. In the early part of December, 1893, Krueger purchased 10 shares of the stock at $50 per share, of $100 par value, and paying $200, which was the amount of the 20 per cent. assessment directed on the stock subscribed. Krueger purchased this stock after an interview with Preisel, one of the directors, in whose office samples of the asbestos taken from the mines were shown, and after receiving a copy of the report of Woltereck and the prospectus, and, as he says, assurances from Armitage as to their correctness. The statements of Krueger and Armitage differ on whether these 10 shares of stock were purchased from Armitage or from the company, but the money was paid to the company on the stock received from it, and as to the form of this transaction, I think it was a purchase of stock from the company. But, as the company had no stock to sell or issue, except as it received it from Armitage on paying $50 per share, under the agreement of July 26, 1893, and Armitage transferred the stock to the company for the sale to Krueger, and the company was to receive from Krueger only the amount it was to pay Armitage, thetransaction was substantially a purchase of Armitage's stock by Krueger, so far as relates to the matter of Armitage's responsibility for statements to Krueger.
Upon making this purchase, Krueger was elected a director of the company, and at his first meeting with the board, on December 2, 1893, the minutes of the previous meetings were then all read, or their purport stated by Armitage, for Krueger's information. Whether the agreement of July 26, 1893, between Armitage and the company, for the purchase of Armitage's stock to the amount of $25,000, was then read or explained to Krueger, does not clearly appear, but Krueger's evidence shows that, at the meeting of December 2, 1893, he understood from Armitage that there was $25,000 to be paid by the company for the Canada mine, and that Armitage had the title papers. Shortly after Krueger's purchase, and before December 19, 1893, an article was published in a New York and also in a Canada newspaper, denouncing the mine and Mr. Woltereck's report, and on that day Armitage and Krueger were appointed as a committee to visit the editor of the New York paper and demand a retraction of the alleged libel. On December 27, 1893, Mr. Woltereck presented to the directors his answers to these charges, and this answer was approved by the board and ordered to be sent to the New York paper for publication, as a retraction of the article published. Krueger now says that he took part in these proceedings, relying on Armitage's assurances as to the correctness of the expert's report, but the action of the board shows, I think, that the board, including Krueger, were relying on the expert's own statements in reply. While this controversy was still unsettled, negotiations were going on between Krueger and Armitage for the purchase of more stock, Krueger being willing to invest about $12,000, with the view of having the company undertake also the manufacture of asbestos. Armitage then proposed to secure for Krueger 500 shares at $24 instead of $50, the price at which it had been previously sold, and to secure the directors' consent to such purchase, and about the end of December, 1893, a verbal agreement was made between Armitage and Krueger, that Krueger would make this purchase. Krueger was not prepared to pay the whole amount in cash and proposed to Armitage to raise $4,000 by a mortgage on the property now in question. Krueger says that he had difficulty in raising the money on the mortgage, and that Armitage said he would find a person to take it for him, and that Smith agreed to take it. The agreement for the purchase of the 500 shares of stock was made in December, 1893, and at that time it seems to have been understood by the directors and Krueger, that the Canadian owners of the mine would only require a payment of $5,000 before allowing the mine to be worked, and on January 4, 1894, the directors, Krueger being present, passed a resolution requesting Armitage to consult with the owners of the property in Canada as to allowing the mine to be worked on such payment of $5,000. Two days later the bond and mortgage from Krueger to Smith was drawn and acknowledged, but they were not delivered until a month afterwards, February 6, 1894. None of the parties now recollect the reason for the discrepancy between the date of the mortgage and its delivery, but it is quite probable that it was retained pending the decision of the amount of money necessary to be raised. It appeared that Mr. Krueger wished to have the company undertake the manufacturing at once and to have as much money as possible for this purpose. A factory was leased and a superintendent employed before the actual delivery of the mortgage. On January 17th Mr. Armitage reported to the board that the Canada owners required $10,000 to be paid before the company started, and the board then proceeded on this basis, which would absorb a great part of the money Mr. Krueger proposed to put in. Notwithstanding this change in the situation, Mr. Krueger proceeded to carry out the contract with Armitage, and on January 22, 1894, the board, by resolution, authorized Armitage to consummate the sale of 500 shares of stock of the company for $12,000 in cash. The name of the purchaser was not stated in the resolution. Mr. Krueger was present and voted for the resolution, as also did Armitage, who says that he agreed verbally with the directors to modify his agreement of July 26, 1893, under which he was to have $50 per share, for the purpose of carrying out this sale. On January 26, 1894, Krueger gave a check to the company for $2,000, this being, as he says, on account of the entire purchase of 500 shares for $12,000, and he then received a certificate for 100 shares of stock, derived by the company from Armitage for this purpose. On February 6, 1894, a payment of $4,000 was ordered by the board to be made on account of the property, and the treasurer (Armitage) was directed to make this payment. The resolution does not expressly refer to the mortgage as the payment, but Krueger and Armitage say that this was the payment. On the same date, the bond and mortgage in question were delivered to Smith, and on February 7th, Krueger is credited by the company with a payment of $4,000 on his stock. This $4,000 credited to Krueger was charged to Armitage by his consent, as a payment to him by the company on account of the mining property. The bond and mortgage were delivered by Armitage to Smith on February 6, 1894, after the meeting of the directors, and the mortgage was recorded by Smith on the following day. As between the company, Krueger, Armitage, and Smith, the transaction in form, as well as in substance, was one by which Krueger, as purchaser from the companyof shares of its stock, paid a portion of the purchase money which it was entitled to receive from Krueger, to Smith, who was entitled to receive (through Armitage) a payment on account of the purchase money of the mine, under Smith's arrangement with Armitage. On the same day on which this payment of $4,000 was credited to him (February 7, 1894), Krueger received from the company a further certificate for 150 shares of stock, also derived from Armitage, making 250 shares of the 500 agreed to be taken, and these 250 shares were fully paid for under the agreement with the company, by the cheat for $2,000, January 25, 1804, and the mortgage for $4,000. There can be no question, I think, that Krueger then understood the transaction of the giving of a mortgage to Smith, as a transaction carrying out his agreement with the company and a payment to the company on account of his purchase of stock, which payment the company was to turn over to Armitage for Smith, as the representative of the Canada owners. Krueger subsequently, and on March 8, 1894, gave to the company his check for $6,000, and received the remaining 250 shares of stock. Armitage received from the asbestos company the further payment of $6,000 in cash (which Smith as the trustee of the mica company was to receive under Armitage's option), less, however, the sum of $1,800, which was part of Armitage's share of the cash payment due to him as his share of the cash payment or on account thereof. Smith, to whom the mica company was indebted for about $1,800, took the mortgage in question as his share of the cash payment due from Armitage and for the company's indebtedness to him. The other shareholders of the mica company received their share of the cash payment directly from Armitage, the entire cash payment made, including the mortgage, being equal to a 3 per cent. dividend on the $225,000 of stock. These shareholders of the mica company subsequently received the shares of stock in the asbestos company, to which they were entitled under the option, these shares being issued direct to them by the asbestos company. In the spring and summer of 1894 Krueger made two visits to the company's mines in Canada, and on these visits became satisfied, as he says, that the report of Woltereck as to the quantity and quality of the asbestos (especially as to the latter) was false.
The company commenced mining, and also carrying out Krueger's plan of manufacture in Newark, but with little or no working capital, and the asbestos received from the mine was of an inferior grade. The operations of the company were not successful, and, toward the latter part of August, 1894, on Krueger's complaints to Armitage about the character of the mine, some negotiations took place between them as to the repurchase of his stock, but these fell through, and, in the fall of 1894, Krueger instituted insolvency proceedings against the company, which resulted in the appointment of a receiver. Krueger says that the proposals for repurchase or transfer included a surrender of the Smith mortgage, but Armitage denies this, and no communication on this subject took place with Smith. The only communication between Smith and Krueger after the execution of the mortgage, was a letter from Krueger to Smith on October 3, 1894, enclosing a check for $100, six months' interest on the mortgage, and requesting an acknowledgment of its receipt. So far as Krueger's claim to be relieved from the payment of the Smith mortgage is based on any dealings between Smith and himself in reference to the consideration of the mortgage, it rests entirely upon Krueger's present statement as to what took place between himself and Smith at or about the time the mortgage was originally drawn and executed before Mr. Preisel. Krueger now says that before the mortgage was delivered there was a conversation with Smith at a meeting (either formal or informal) of the directors in Mr. Preisel's office, at which Smith was present, and on that occasion one of the directors (not Krueger), suggested asking Smith about the mine, and what he knew about it, in reference to the different openings reported to have been made in the prospectus and Woltereck's report, and that Smith then said he knew the mine and had been over every inch of the ground, and knew all the facts contained in the Report to be true. Krueger also says at the present hearing that there was probably another conversation with Smith on January 6th, at the time the mortgage was drawn, but he does not recollect what was said, except that the mortgage was for Smith's stock, and that Smith was a partner of Armitage. Both Smith and Armitage deny such conversations, or any attendance by Smith at any such meeting at all between Smith and Krueger at the time the mortgage was drawn by Preisel. Smith also denies that he ever saw Woltereck's report, but says he may have seen the prospectus. Preisel corroborates Krueger as to Smith being present in his office at the time the mortgage was drawn, but does not remember any statements by either Smith or Armitage in regard to the mine, or any paper describing the mine. There is no other corroboration of Krueger in reference to any interview between himself and Smith connected with the giving of the mortgage, and if reliance on his present evidence as to the transaction was not shaken by his testimony previously given in the suit against Armitage alone, it would not be sufficient, in my judgment to establish that he executed the mortgage in reliance on any representations of Smith, either about the mine or his interest with Armitage in the stock purchased by Krueger. In the former suit he sought to recover from Armitage the entire amount of $12,500 invested, including the $4,000 mortgage as partthereof; and in then giving an account of the drawing of the mortgage at Preisel's office, no mention of Smith's being present. His statement then was that he agreed to meet Armitage at Preisel's office, and, when Preisel was drawing up the mortgage, Armitage directed it to be made to Smith; that he (Krueger) didn't know who Smith was, or what Smith was in the deal; that Armitage had agreed to give him the stock, and it was all the same to him where the mortgage was going, and so he let it go, as it was none of his business, as he got the stock for it He also swore, in the Armitage suit, that he had no dealings with Smith, but now says that statement is not true. And upon the vital question of fact in the present suits, whether the mortgage was made in reliance on any representations of Smith in reference to the mine, Krueger's payment of interest on the mortgage to Smith in October, 1894, after Krueger had ascertained, as he claims, the falsity of the representations in regard to the mine, must be considered as affecting the credit to be given to Krueger's statement that he relied on Smith's representations. This payment was made without any objection, or any reference to such statements, and after their falsity, if made, had been discovered. Upon the whole evidence, I conclude that Krueger has failed to show satisfactorily, either that Smith made to him the representations claimed, or that such representations, if made as claimed by Krueger, induced the purchase of the stock. The conclusion which I reach is that Krueger, before any conversation with Smith, had completed the agreement for purchase of the 500 shares of stock with Armitage, and had, together with the other directors, considered and acted on the matter of the correctness of Woltereck's report, and that Smith's general statement, if made under the circumstances stated by Krueger, cannot be considered as inducing Krueger's contract of purchase, or the execution of the mortgage carrying out this purchase.
As to the second claim on which the defense to the mortgage of Smith and the bill against him is based, viz., that the mortgage was given for the purchase of Smith's stock, and was procured by a fraudulent combination and conspiracy between Smith and Armitage, the evidence fails to establish either of these facts. Smith had no interest in the stock purchased by Krueger, nor did he have any stock in the asbestos company until April, 1894, when he received shares which he was entitled to receive from Armitage under the option. The evidence does not establish Smith's responsibility for, or connection with, any statements made by Armitage to Krueger for the purpose of effecting the sale of the stock, and although Smith knew of Armitage's efforts to sell the stock to Krueger, it does not appear that he knew what representations were made by Armitage to Krueger. In making the sale of the stock Armitage was not acting as the agent of Smith, but on his own behalf, or that of the asbestos company. Smith, therefore, cannot be held responsible for any misstatements which may have been made by Armitage. At the hearing, it was also claimed that the mine, to Smith's knowledge, was worthless, and that the whole consideration for the mortgage therefore failed. The proof does not, however, sustain this claim as to the mine, and inasmuch as the consideration of the mortgage, so far as Krueger was concerned, was its acceptance by the company as a cash payment on his obligation to pay for his stock (from which obligation he has been to that extent relieved), the consideration of the mortgage has not failed.
Defendant Armitage, in addition to a general denial of the charges and allegations against him made in the cross-bill, sets up two special defenses in his answer: First, that he has no interest in the bond and mortgage given to Smith, as was charged in the cross-bill, and that independent of such interest, Krueger is not entitled to any relief in this court against him by way of damages. As to any such relief, the benefit of a demurrer was claimed. The general rule is that jurisdiction in equity in cases of fraud is concurrent with that of the courts of law, and the question of its exercise depends on the whole aspect of the case, on the pleadings, and proofs. The concurrent jurisdiction is asserted, and the exclusive jurisdiction of courts of law for recovery of damages caused by fraud is denied in Eggers v. Anderson (Err. & App. 1901) 63 N. J. Eq. 264, 49 Atl. 578, 55 L. R. A. 570. In this case the equitable jurisdiction was exercised solely for the recovery of money obtained by fraud. One reason for exercising the jurisdiction was stated to be that the exercise of the jurisdiction bad not been objected to in limine as in Krueger v. Armitage, and as has been done in the present case. But, in the present case, the trial, in this court, of the question of fraud was necessary because it was set up as a defense to the mortgage and as a reason for the equitable remedy of cancellation sought by the cross-bill in the mortgage suit. The claim for damages in addition was based on the same alleged fraud. This issue of fraud on the part of Armitage, in the sale, being properly here, the court, in exercising its concurrent jurisdiction, should dispose of the issue of fraud and of damages resulting from it, in a single action and for all purposes.
The second special defense set up by Armitage is the statute of limitations, and, in my judgment, this must be allowed. The first bill against Armitage was dismissed on October 5, 1899, expressly without prejudice to an action at law. No appeal was taken from this decree and no action at law was brought. The last payment made by Krueger for the stock was on March 8, 1894, and the right of action at law expired on March 8, 1900. The bill to foreclose his mortgage was filedby Smith on February 20, 1895, and Krueger's answer and cross-bill against Smith alone, for cancellation of the mortgage, was filed April 4, 1895. Proceedings in this suit were delayed pending the hearing and decision of the suit of Krueger v. Armitage, in which, as above stated, Krueger claimed against Armitage for the whole amount invested, including the $4,000 mortgage given to Smith. On November 29, 1901, the present bill against Smith and Armitage was filed. So far as relates to Smith, the equitable remedy for a cancellation of the mortgage is not affected by the statute of limitations; but so far as relates to the recovery of damages in addition, either against him or Armitage, the statute is a bar. The settled rule is that where the jurisdiction in equity is concurrent with that at law, the suit if barred at law is barred in equity. Conover v. Conover, 1 N. J. Eq. 403 (1831); March's Ex'rs v. Oliver's Ex'r, 14 N. J. Eq. 259 (Ch. Green, 1802), cited by me in Condit v. Bigalow (1903) 64 N. J. Eq. 514, 54 Atl. 160. If the time of the discovery of the alleged fraud be, in equity, the time when the statute begins to run, then the suit was barred in six years after August, 1894.
The bill by Krueger must therefore be dismissed as against both defendants. Smith is entitled to a decree for the amount due on his mortgage and to a dismissal of the cross-bill filed against him.