Cunningham v. Jones' Exrs.

Opinion of the court by JUDGE DuRELLE Affirming. Appellant, Cunningham, brought suit against the executors of Paul Jones, claiming that 600 shares of stock in the J. G. Mattingly Company, in the name of Paul Jones, were subject to redemption by him, and that on May 14, — 734 — 1894, be bad tendered to Jones $41,410 in redemption of tbe slock, and asked that Jones’ executors be compelled to accept the money and turn over tbe stock. He bad previously set up by a cross action tbe same claim in a suit by W. H. Thomas & Son, to which Cunningham and Jones were parties defendant, but so much of bis pleading aá set up tbe cross action was stricken out of tbe suit. At a sale at public auction by tbe assignee of tbe Arm of J. G. Mattingly & Son, the distillery plant, including tbe brands of that firm, was purchased by W. H. Thomas, J. A. Cunningham, and Paul Jones for $125,000. Thereupon tbe J. G. Mattingly Company was incorporated, with a capital stock of $300,000, $250,000 of which was paid for tbe distillery plant, which was conveyed to tbe company, and rthe other $50,000 was agreed to be furnished, one-third by each, by the three incorporators, as working capital The assets of the corporation therefore represented $125,100 paid for the property, and $50, 000 working capital, of which $100,000 was'raised on the note of the corporation, indorsed by the corporators, and the remaining $75,000 was to be paid in cash. Thomas paid in'his $25,000 in the spring of 1890; Cunningham paid in $20,000, which he obtained on the indorsement of his son-in-law, Mr Frank L. Powell; and Jones paid in $25,000 in cash. Cunningham did not pay in the remaining $5,000 due from him at that time, but carried a cash ticket in the drawer for $5,000 until June, 1891. The $100,000 note of the corporation was carried by the Kentucky National Bank until September, 1890, when payment was demanded. Jones thereupon paid his one-third of the amount. Thomas gave a note indorsed by Jones and Cunningham, which was discounted by the bank, and ’Jones executed to Cunningham two notes of $10,000 each, — 735 — and one for $15,000, which were discounted by the latter at the First National Bank, and the proceeds used In payment of his one-third. After this arrangement was made, the stock cf the corporation was issued, 1,000 shares to each of the three corporators; and Cunningham thereupon indorsed his stock, and turned it over to- Jones as security for the payment of the notes aggregating $35,000. Shortly thereafter, being threatened with a suit by a bank at Danville, Ill., he informed Jones of the fact; and Judge William Lindsay, being called in for consultation, prepared what is known in this case as the “Lindsay Paper,” which speaks for itself: “This paper is to show that, in order to enable James A. Cunningham to pay for (1,000) one thousand shares of the capital stock of the J. C. Mattingly Company of Louisville, Kentucky, I executed to him three certain promissory notes dated August 29, 1890, — one for ten thousand dollars, due in four months; one for fifteen thousand dollars, due in five months; and one for ten thousand dollars due in six months. Said notes were executed under and in virtue of an agreement that Cunningham was to discount them at the First National Bank of Louisville, and apply the proceeds to the payment for the said stock, and that I was to hold 'the said stock in lien to secure me against loss in case I should be compelled to pay ofll the said notes, or any part of the same; also, that I have paid off the two notes, respectively, in four and five months, and am still bound on the ten thousand dollar note due in six months. Now, pursuant to the said agreement, mi the said 29th day of August, 1890, the said Cunningham transferred to me his certificate for the said one thousand shares of stock, to hold in lien as aforesaid. Afterwards, on December 5, 1890, with the consent of the said Cun736 ningbam, 1 caused the certificate tor the said one thous- and shares of stock to be issued to myself. Now, on the same day, with the consent and in obedience to the instructions of the said Cunningham, I surrendered the said last-named certificate, and caused a certificate for one share of the said stock to be issued to the said Cunningham, and a certificate for (499) four hundred and ninety-nine shares to Frank L. Powell, and (500) five hundred shares to myself. These said five hundred shares I hold in lien to secure the payment to me by the said Cunningham of the amount of the two notes I have already paid as aforesaid to the First National Bank, and to indemnify me against loss on the note not yet due. For the sums so paid I hold the two notes of the said Cunningham, one dated December 30, 1890, for ten thousand dollars, due four months after date, and the other for fifteen thousand dollars, dated- January 6, 1891, and due four months after date; each note bearing seven per cent, interest from date. Now, when the said Cunningham shall pay off and discharge the said two notes, and each of them, and shall hold me harmless and free from liability on the said note for ten thousand dollars, not yet due, he is to be entitled to the said five hundred shares of stock, and to have the same transferred to him, or to such parties as he may order or direct. [Signed] Paul Jones. Louisville, Ky., January 24th, 1891. “The within paper sets out fully and correctly the transaction therein mentioned. [Singed] J. A. Cunningham.” There can be no mistake as to what this paper means, nor is there any dispute as to what it was- intended to mean. Jones 'became president of the corporation, without salary, and Cunningham was made general manager, at — 737 — a salary of $7,500 for the lirst year, and afterwards at $300 per month, until September, 1892, at which time he resigned. About June, 1891, in order to make good his cash ticket of $5,000 in the drawer, his son-in-law, Mr. Powell, accepted a draft for $6,000 to his order, which was indorsed by him and Jones, discounted, and the proceeds used to pay the amount due by Cunningham to the Mattingly Company, with interest from the time the money should have been paid in. In October, Jones expressed a doubt as to whether he -was sufficiently secured for Cunningham’s notes, all of which he had taken up at their maturity, and notes in lieu thereof had been executed by Cunningham to Jones for their amount, and requested a transfer in addition of 200 shares of the 499 held by Powell. All of that stock, except 100 shares, had been used as collateral in other transactions, but the 100 remaining shares were transferred and pledged to Jones. The $6,000 draft was paid off by Cunningham in February, 1892. On March 4, 1892, the following paper was drawn up: “This memorandum of agreement between Paul Jones, of the first part, and Frank L. Powell, of the second part, and J. A. Cunningham of the third part, witnesseth as follows: The said Jones holds three notes executed to him by the said Cunningham,-— one dated December 30, 1890, in the sum of $10,000, payable four months after date; another dated January 6th, 1891, payable four months after date, in the sum of $15,000; another dated March 2, 1891, payable six months after date, in the sum of $10,000. Each of said notes bears interest from its date ¡ait the rate of seven per cent» per annum. Calculating interest on the said notes at six per cent., and credit — 738 — ing any interest which has been paid, there is still a large amount of interest due upon said notes, and no pant of the principal of any of them has ever been paid. In order to secure payment of the said notes, the said Jones hias a certificate for 500 shares of the capital stock of the J. G. Mattingly .Company (being certificate No. 7), which was issued to him at the instance of the said Cunningham; and the said Jones has also, to secure the payment of the said notes, a certificate of 100 shares of stock in the same ■company (being certificate No. 10), and which was issued to him at the instance of the said Frank L. Powell. The value of said 600 shares of stock is not equal to the amount due upon the said notes, but it has been agreed between the parties hereto as follows: (1) The said Cunningham and the said Powell hereby release and quitclaim all of their interest in the said 600 shares of stock, and do now declare that the same does, from and after this date, belong absolutely to the said Paul Jones. (2) The said Paul Jones does hereby release the said Cunningham from the said notes, and from any and all obligation to pay the same, and does hereby declare them canceled. (3) This is to be taken as a full settlement of the matters herein set forth. In testimony whereof, the said Jones, Cunningham, and Powell have hereunto set their hands this 4ih day of March, 1892. [Signed] Paul Jones. J. A. Cunningham. F. L. Powell.” At the same time with the execution of- this paper the three notes were marked “Paid,” were canceled and delivered to Cunningham, and Cunningham delivered to Jones his duplicate copy of the Lindsay paper. There can be no question about the meaning of this paper. Its meaning is as plain as the English language can make it- But it is claimed by Cunningham that the — 739 — paper was procured by tbe fraud, covin, imposition, misrepresentation, and deceit of Jones, and was an unconscionable, illegal, fraudulent, usurious instrument, and a perversion and illegal abuse of tbe trust relations existing between Cunningbam and Jones at the time, and that it did1 not evidence the actual contract, intention, understanding, or agi*eement then entered into between them, and was inequitable, illegal and void. It is claimed that tbe incumbrance upon Cunningham’s stock shown by tbe Lindsay paper was tbe sole consideration for tbe execution of tbe new paper; that it was obtained solely by virtue of tbe influence of that incumbrance: that tbe only consideration for tbe transfer of tbe 100 shares was tbe indebtedness of $6,000, which bad been already paid; that on March 4th, tbe 600 shares of stock were worth more than double appellant’s indebtedness to Paul Jones; that at tbe time of its execution Jones represented to Cunningbam that Ms right of redemption should continue; that at various times be made statements to the same effect to other persons, and in December of tbe same, year demanded of Cunningbam that be then redeem tbe stock; that at various times be recognized the existence of a right of redemption; and that tbe relations of trust and confidence existing between tbe parties to this paper with regard especially to tbe stock in controversy, with tbe other circumstances, showed that Jones held the stock in trust for Cunningbam. By the acquisition of tbe 600 shares of stock, if this paper is valid, Jones acquired a majority of tbe stock of tbe corporation, and a controlling interest therein, at a cost to him of about sixty-one cents upon the dollar of its face value. There is considerable testimony directed by appellant to tbe proposition that tbe value of tbe stock — 740 — was greatly in excess of the amount of indebtedness canceled by the transfer of March 4, 1892. This testimony, in so far as it is convincing, tends to lessen the force of the argument that the Humphrey paper was obtained solely by virtue of the influence of the relationship of debtor and creditor existing between the parties; for, in so far as the value of the pledge at that time exceeded the amount for which it was in lien, so far was it rendered easier for the pledgor to obtain money for the purpose of redemption. It is not satisfactorily shown that the bargain set forth in the Humphrey paper was an unconscionable one, if therein truly set forth. It is true that in November, 1890, Jones declined an offer of ,$125,000 for his 1,000 shares of stock; but the evidence tends strongly to show that in the fall of 1891 and spring of 1892 Jones did not regard the investment as a good one, and was willing to part with his interest for cost and interest, and that about that time he gave an option upon his interest at a slight advance upon that figure, and it is admitted by Cunningham that Jones approached him about getting a buyer at seventy-five cents on the dollar. It is unnecessary to go into the details of the evidence upon this branch of the case. It sufficiently appears that neither Jones nor Cunningham at or about the time of this transaction took as rosy a view of the situation of this speculative business as the subsequent history of the corporation might seem to warrant. It does appear that about this time the burden of financing the institution fell almost entirely upon Jones, and that he was weiary of the business and anxious to retire from it, but was unable to do so. . About this time he learned that he was sick with a mortal sickness. He communicated this fact to Cunningham; stating that he was in bad health, that he — 741 — thought of going abroad, and that the business was not in a shape satisfactory to him. Thereupon the Humphrey paper was executed. Granting that Jones knew he had a malady -which must prove'fatal, and that he desired to get his business in such shape that it could be easily managed, we are unable to see what advantage there was to him in the agreement which Cunningham claims was made. He had :a continuing lien upon the stock pledged with him to secure the repayment of Cunningham’s indebtedness. This he could enforce, not merely upon the 500 shares, but upon the 100 shares which Cunningham himself states were pledged both for the $6,000 draft and for the notes theretofore given. Why he should desire to transform this enforceable agreement into an agreement whereby Cunningham had the right to redeem, but no obligation to pay, we are unable to see, except upon the theory argued by counsel, — that he did it with the deliberate and set purpose of carrying out an elaborate scheme of fraud, of which we think there is no sufficient evidence. There are many circumstances detailed by the witnesses which tend to support the contention of Cunningham, but the physical facts of the transaction itself, together with the situation at the time the transaction took place, seem to us to rebut the presumption drawn by appellant’s counsel. The new paper was executed both by Cunningham and his son-in-law. They had opportunity to examine it, and there is evidence that they did so. There is testimony to show that Powell regarded it as an absolute sale by Cunningharn to Jones, and an extinguishment of Cunningham’s debts to Jones. The Lindsay paper was given up, which up to that time had evidenced an indebtedness by Cunningham, with right of redemption, and a mere pledge of the stock to — 742 — secure that indebtedness. And finally the notes ' which evidenced that indebtedness were marked “Paid,” and were danceled and delivered over to Cunningham as evidence of the extinguishment of the indebtedness. Very-strong evidence of fraud should be required to overturn so definite and so complete a transaction as this one. Months before the next election of directors, Jones notified Cunningham that he intended to leave him out of the directory. He could do this only by voting what Cunningham claims to have been his stock. Cunningham appears to have been present at the meeting, and made no objection to Jones turning him out of the directory. It is, as said by the trial court, “incredible that Mr. Cunningham and his son-in-law, Mr. Powell, should not have understood this instrument, and the plain and unequivocal terms in which it is couched. It was an absolute bill of sale, extinguishing any right of redemption which the pledgor theretofore held In said stock pledged as collateral. The law did not forbid the pledgor and pledgee to meet together, and for a sufficient consideration to enter into such contract. . . . The legal presumption is that the instrument is what it purports to be, and the evidence in this case shows that the parties to the transaction understood it and knew what they were doing, and that instead of its being oppressive to the pledgor, Cuu-ningham, the transaction at the time was one which relieved him from a debt which he could not pay, and to satisfy which the collateral itself was insufficient.” It is hardly, necessary to cite more than a few authorities which we think sustain the conclusion we have reached: Montague v. Bell, 14 Ky. Law Rep., 890; Spitze v. Railroad Co., 23 Atl., 307; (32 Am. St. Rep., 386); May v. John — 743 — son, 3 Ind., 449; Sanger v. Dun, 47 Wis., 615 (3 N. W., 388); Blackwell v. Railroad Co., 16 Atl., 12 (32 Am. St. Rep., 789), 17 L R. A., 729). The thanks of the court are due to counsel upon both sides, whose preparation of this case hlas been such as greatly to lighten the labors of the court in the consideration of a record which otherwise would have been a matter of enormous labor. The judgment is affirmed. Petition for rehearing filed by appellant and overruled.