US SUPREME COURT DECISIONS

A farmer and his wife on the line of a proposed country railroad subscribed to stock in the road and mortgaged their farm, upon representations made to them by agents of the road and others, in a time of excitement got up at public meetings, that the road would prove a most lucrative investment of money, a very profitable thing to the neighborhood, and would enable farmers to sell the products of their farm at a large advance over existing prices. The making of the road was begun, and after a good deal of money had been laid out in grading &c., the further making of it was absolutely stopped for want of funds, and it remained unmade. chanrobles.com-red

Page 86 U. S. 147

The mortgage thus got was assigned to a director of the road who was a large creditor of the road (then much embarrassed for money), when the mortgage was given.

Held, on a bill by him to foreclose, that he was to be taken as an innocent holder for value, and that on the distinction recognized by the law between a representation of existing facts, and a representation of facts yet to come into existence -- the distinction between "promissory statements" based upon general knowledge, information, and judgment, and those representations which, from knowledge peculiarly his own, a party may certainly know will prove to be true or false -- he was entitled to a decree.

Ephraim Sawyer filed a bill in the court below against Henry Prickett and wife, to foreclose a mortgage given by them, on the 1st of September, 1857, to the Fox River Valley Railroad Company, to secure the payment of a note for $2,000 at ten years from its date, and by the company assigned to him, the complainant. The answer set tip as a defense that at the date mentioned, Prickett gave the note described to secure the payment of a subscription to the stock of the railroad company mentioned, and that this subscription was obtained by fraud and deceit, and so that the note and the mortgage were void.

The fraud and deceit alleged consisted in the following matters which the answer stated, to-wit, that two persons, one Conover and a certain W. G. Parsons, of Milwaukee, in Wisconsin, as agents of the company, and John Sibley and W. A. McConnell, residents of Richmond, in Illinois, caused it to be understood that a railroad had been incorporated to extend from Richmond to Milwaukee aforesaid, and

"that the said parties above named, for the purpose of inducing the property owners in Richmond and its vicinity to take an interest in the road, and to subscribe for the stock of the company, resorted to fraudulent and deceitful artifices and representations; that they caused a subscription book for the taking of subscriptions to the stock to be prepared and opened at Richmond; that they caused McConnell, a man of large means, and one in whom the

Page 86 U. S. 148

citizens of Richmond and its vicinity had confidence as a man of integrity and good judgment, and of prudent and sagacious management of business, to head such subscription list, as a subscriber to the stock, to the amount of $1,500; that for the same fraudulent purpose they caused one John Woodell, a citizen of Richmond, and a man at that time of considerable means and of good business reputation, to appear in the subscription list as a subscriber to the stock to the amount of $1,000, and, also for the same purpose, caused it to be represented and believed among the residents of Richmond and its vicinity that the said John Sibley (already mentioned), a person at that time of means and large influence in that community, and of integrity, had subscribed largely to the stock; and further, that the railroad, when constructed, would greatly enhance the real estate and other property in Richmond and its vicinity by furnishing a market in Milwaukee for the farm products raised in the vicinity of Richmond, and that the said market, especially for the sale of wheat, would be much more advantageous to the farming community of Richmond than the market which they now had at Chicago."

That the said parties publicly represented, and caused it to be believed by the residents and property owners of Richmond and its vicinity, that the company would pay large dividends upon its stock; that farmers and parties owning real estate could become the owners of so much of the stock as they should subscribe for, by giving their notes for the amount so subscribed to the company on long time and drawing interest at 8 percent per annum, and securing the notes by mortgage upon their farms or other real estate; that the company would promptly pay all the interest upon said notes so given, as the same should mature, out of the dividends that would from time to time be declared upon the stock of the company, and that the balance of the dividends, after the payment of the interest, would be amply sufficient to pay the principal of the notes when the same should become due.

That, in this manner and by these means, the said parties chanrobles.com-red

Page 86 U. S. 149

aroused and caused a great interest and unusual excitement among the citizens, residents, and property-holders of Richmond and its vicinity regarding the railroad, and that large numbers of them, relying upon the flattering representations made, as aforesaid, were prevailed upon to subscribe to the stock of the company; that the defendant was among those who, by the means, in the manner, and upon the representations made, as aforesaid, became and was interested in said railroad project; and that after he had thus become informed thereof, and of the general features of the railroad project, as hereinbefore set forth, and had become greatly excited on account thereof, a short time prior to the said 1st of September, A.D. 1857, the said Conover and Sibley represented to him that the company was duly incorporated and fully organized, and that it would construct and equip the road and have the same in full and complete operation within one year from the date last aforesaid; that the railroad, when constructed, would greatly enhance the value of the defendant's real estate, by furnishing better market facilities, as hereinbefore stated; that the defendant would not be required to pay any money for the stock so subscribed for by him, but that the company would take in lieu of such money his note, payable in ten years from date, with interest thereon at 8 percent per annum, secured by a mortgage of the land owned by him; that the railroad would earn large dividends, and that the company would pay the interest upon the note as it should mature, and that, with the excess of dividends, the company would be amply able to pay the principal of the note when it should become due.

The answer averred also that the defendant reposed confidence in these flattering statements, and relying upon the promise given, subscribed for $2,000 of the capital stock of the said company, and gave the note and mortgage in suit to secure the payment of the same.

It further averred that the Fox River Valley Railroad Company was never incorporated; that no part of it had ever been built; that it had been given up and abandoned; that McConnell, Woodell, and Sibley were not subscribers chanrobles.com-red

Page 86 U. S. 150

for stock as was represented, or that their subscriptions were upon a secret agreement that they should stand upon the books for larger sums than were actually subscribed by them; that McConnell, appearing as a subscriber for $1,500, should only be bound for $500; and that Woodell appearing as a subscriber for $1,000 should only be bound for $500; and that Sibley never subscribed for any amount of stock, and never gave his note and mortgage as was represented.

It further averred that these misrepresentations were made with an intent to defraud; that the complainant was not a bona fide holder of the note and mortgage, but was himself one of the projectors and managers of the fraudulent contrivance, and well knew all of the facts alleged before he became the owner of the instruments.

Replication being made, testimony was taken. Sawyer, Prickett, McConnell, Sibley, and Woodell were all examined as witnesses.

From the testimony the facts of the case appeared to be thus:

The Town of Richmond was a small place, close to the north line of Illinois, and between Milwaukee on the north of it (about fifty miles off), and Chicago, on its south, at a greater distance. It had a railroad connection, through the railroad of the Fox River Railroad Company of Illinois, with Chicago, but none with Milwaukee.

In this state of things the Fox River Railroad Company of Wisconsin was incorporated in Wisconsin, to connect by a prolongation of the Illinois road Richmond and Milwaukee, Milwaukee being the place where the organization of the latter company was had and the place from which its affairs were managed.

The charter being obtained and the company organized as early at least as 1854, efforts were put in action to build the road. Prior to 1856, the subscriptions to the capital stock coming in slowly, ready funds were short. In 1855 or 1856, Sawyer, then a director with other directors, lent the road money. The work was still going on. And in the autumn of 1857 -- there being still stock unsubscribed for -- a committee, chanrobles.com-red

Page 86 U. S. 151

on which was Conover, then a director and lately before president of the company, and Parsons, at one time its secretary but now its "stock agent," were appointed to go to different villages along the line of the projected road to procure subscriptions for the stock yet untaken. Among other places to which they went was Richmond. Here they got up meetings, got speakers to come and address the citizens, and publicly and privately represented the great benefit that it would be to the farming community to have the road; that the Milwaukee market would give five cents a bushel for wheat more than the Chicago; that stock in the road would probably pay thirty percent dividend, and be a fine investment for the farmers to make; that if they would take stock they could take it by giving a mortgage running ten years at eight percent interest, payable annually; that the company was willing to pay the interest; that the person giving the mortgage would not be called upon for the interest; and that if they would let the dividends of the road remain in the company's hand, in ten years, or before, the dividends would pay for the stock and perhaps more, and then that the farmer would have his stock clear.

The matter was thus summed up by McConnell, one witness in the case:

"They made some very fine speeches, and told what they would do for us if we would sign for stock, and told us a great many things, and those statements induced the people to subscribe."

At one of these town meetings in Richmond, a committee composed of McConnell, Sibley, and some other persons, was appointed to solicit subscriptions.

McConnell, who was regarded as one of the most judicious men of Richmond, headed the list with a subscription for $1,500 of the stock, but he did not actually give a mortgage on his property, though he was bound to do so when called on by the company to do it.

McConnell, Sibley, and other citizens of Richmond, then went about at different times for a few days, while Conover and Parsons remained at Richmond to get subscriptions. chanrobles.com-red

Page 86 U. S. 152

Among the farmers in the neighborhood of Richmond was Prickett; he had already met Conover in the town. Prickett's own account of the matter was thus:

"I own the real estate described in the bill of complaint, and have owned it for twenty-one years; it is now occupied by me as the residence of myself and family, and has been so occupied by me as a residence and homestead for twenty years, and during that time I have worked the farm."

"The first that I saw of Conover was in the Village of Richmond. He and a number of citizens were together; they thought the property would be enhanced by having a railroad; they came to me and wanted me to subscribe. The first time that they came to me, I told them I would not have anything to do with it. Afterwards I did sign I would not have anything they represented to me that I should never have anything to pay; that they would pay the interest, and that the dividends upon the road would pay the principal; that at the time the mortgage ran out, I should be ahead. A short time after that they came to my house, Mr. Parsons with the squire, to acknowledge the mortgage, and my wife held out about signing it half an hour, I should think. They talked to her and told her it would be an everlasting benefit to her to sign it, and that the railroad would probably make thirty percent, and it would give her and her family $600 a year always. Mr. Sibley and this Conover were the two principal agents in getting subscriptions, and when they came to get the mortgage this Mr. Parsons came with the squire, in order to induce us farmers to subscribe to the subscription list. Conover said the rolling stock would be on in eighteen months. They got Mr. McConnell, a leading citizen, to sign. They used every means they could to induce persons to become subscribers to the stock. They represented that the road would be a good thing; that it would bring us a better price for our produce, enhance the value of our property, and that we should never have anything to pay for it -- the dividends would pay the interest, and they would pay the principal; they held meetings and got up a great excitement. The influence was principally exerted by some of our own citizens -- Mr. McConnell, Mr. Sibley, and some others in whom we had the utmost confidence. We thought that if they took stock we could take it too. Mr. Sibley, a citizen in whom we

Page 86 U. S. 153

placed the utmost confidence, said he had mortgaged his house and lot, and that it would be a good thing; induced me in every way to sign, and others; it is not necessary to mention their names. Dr. Stone, Dr. Bennett, and some others. I did not attend any of the meetings held for the purpose of obtaining subscriptions."

The following question was asked of the complainant on his examination as a witness:

"Would you have become a subscriber to the capital stock of this company except from the fact that Mr. McConnell became a subscriber thereto, and the other parties you have named?"

To this he answered:

"If they had not represented as they did, and if McConnell and other leading citizens of the town had not subscribed, I certainly should not; but the representation was an inducement to make farmers subscribe, 'See here, you put in $2,000 and you get $600 for life. Is not that enough?'"

"Cross-Examination"

"Question. You say in your direct examination 'the influence was principally exerted by some of our own citizens, Mr. McConnell, Mr. Sibley, and some others in whom we had the utmost confidence.' Do you mean by that that you were influenced by Mr. McConnell and Mr. Sibley to subscribe for this stock?"

"Answer. By Mr. Sibley, more particularly. He pictured it out so nice to me that he had a great influence on me to take stock."

"Question. Did you see Mr. Sibley on the day on which you subscribed for this stock?"

"Answer. No. It was some time before that; almost every day he was exerting himself in the matter."

Parsons, it appeared, was a witness to the mortgage, the wife executing it by a cross or mark.

McConnell testified that in the autumn of 1857 he subscribed for $1,500 worth of stock, agreeing to give a mortgage at ten years, on the plan already mentioned; but that in the spring of 1858, the intended subscription by mortgage was converted into a cash subscription of $1,200, "a square chanrobles.com-red

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trade," he receiving only twelve shares of stock; that he was never an agent for the company, nor received a cent from it.

Sibley testified that at the solicitation of the town meeting -- of the citizens, and not at all of the company -- he had gone out, as a private citizen, for about a day and a half, having then leisure, and solicited subscriptions; that at other times when going backwards and forwards, to and from the village, which was seldom, if he met a man who he thought was interested, he would ask him to take stock; that he dropped the whole matter within three weeks; that he had never asked Prickett to subscribe or even knew that he had subscribed; that he had never himself subscribed for any stock in the Fox River Railroad Company, incorporated by Wisconsin; and had never represented to Prickett or to anyone that he had; that he told to different people (as the fact was) that he had taken $500 worth of stock in the Fox River Railroad Company incorporated by Illinois, and that "it was fair for them to subscribe for stock in the Wisconsin road, as this was a continuation of the Illinois road."

Sawyer testified that he was director of the road in 1855 and 1856, but not after the last year; that after that time he "had been kind of out one side, and proposed to keep away;" that in the summer of 1854 he had solicited subscriptions, and had for one day been with the agents of the company, and saw how they got them; that

"there was an understanding that the company would pay the interest so long as it kept the mortgages, but if transferred it would be no defense after they passed into a third person's hands;"

that he was a subscriber to the stock, $500 cash, $5,000 mortgage, which last he cashed at eighty percent. In addition to this, that in 1855 or 1856 -- while he, Sawyer, was a director -- the company getting into straits for money, he, "with some of the other directors," had lent to it their individual notes, which they had themselves to take up; that they had taken them up, he, Sawyer, to the amount of $10,000; that he and the other lenders then sent their chanrobles.com-red

Page 86 U. S. 155

attorney up to see what securities he could get, to do the best he could, and that he got for all parties in common, certain mortgages, which, like that of Prickett's, had been given for stock; and that that of Prickett's had fallen to his, Sawyer's, lot in the division, the claims on the company being released.

Woodell, who it was alleged in the bill had subscribed for $1,000 worth of stock, with an understanding that he should really be bound to take but $500 worth, was not examined. He had left Richmond, and was said to live in Iowa. One witness said that Woodell had told him this, but there the matter rested.

The railroad company had undoubtedly been incorporated both in Illinois and Wisconsin. About $150,000, raised partly from cash subscriptions, but much more largely by farm mortgages, passed off to contractors at par, or sold to others at eighty percent and like great rates of discount, had been expended on the road. It had been graded, but by 1859 the company formed to make it found itself so entirely without money that it could do nothing more then, and in that year the further construction was stopped, though the project was not entirely abandoned as desperate.

At the time when Prickett gave the mortgage, Parsons, the stock agent, gave to him two papers, thus:

"Whereas, Henry Prickett, obligor, has executed a note and mortgage in favor of the Fox River Valley Railroad Company, a body corporate, created by the laws of the State of Wisconsin, bearing date on the first day of September, A.D. 1857, payable in ten years from the first day of September, A.D. 1857, for the sum of $2,000, with interest annually at the rate of 8 percentum per annum, from and after the said first day of September, A.D. 1857. And whereas said note and mortgage have been received in payment of twenty shares of the capital stock in said company. Now, therefore, in consideration of the relinquishment and assignment, by the said obligor to the said company, of so much of the dividends on said stock which he may become entitled to as shall be sufficient to pay the interest on said note, the said company agree not to demand said interest from him,

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and in case said note and mortgage shall be negotiated by said company, then said company agree to save him harmless from said interest. And the said obligor hereby assigns to the said company so much of any dividend to which he may become entitled on said shares as shall be sufficient to pay off said interest, and agree to pay said principal sum when the same shall become due."

"And it is further understood that this agreement of the said company to relinquish said interest, or to secure the said obligor harmless therefrom, shall not be a defense on his part against the payment of such interest, if said note and mortgage shall be in the hands of a third party as security or otherwise. Nevertheless said company will at all times punctually pay and discharge the same."

"In witness whereof the board of directors of said company have caused these presents to be signed by their duly constituted secretary, and the said obligor has also set his hand and seal, on this first day of September, A.D. 1857."

"C. H. MILLER, Secretary"

"[SEAL] HENRY PRICKETT"

"STOCK CERTIFICATE"

"To the Secretary of the Fox River Valley Railroad Company of Wisconsin"

"SIR: This is to certify that Mr. Henry Prickett, of McHenry County, Illinois, is entitled to a certificate of twenty shares of the capital stock of the Fox River Valley Railroad Company, he having executed a mortgage for the same to this company, provided the property described in said mortgage is free from other encumbrances."

"W. G. PARSONS, Stock Agent"

"September 1st, 1857"

The court below dismissed the bill for foreclosure, and the complainant brought the case here. chanrobles.com-red

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