— "William P. Bettendorf died intestate, June 3, 1910. He left a widow, Elizabeth H., whom he had married September 9, 1908, his first wife having departed this life several years before. He was without children; but a father and mother, Michael and Katherine Bettendorf, and one brother, J. "W. Bettendorf, survived him. Aside from household furniture, life insurance, patents, and royalties owed for their use, his estate consisted of 643 shares of the capital stock, consisting of 1,000 shares of the par value of $100 each, issued by the Bettendorf Axle Company. This property, other than such as was exempt to the widow, passed to the administrator, J. W. Bettendorf, who qualified as such a few days after decedent’s death. No claims were filed; and, save the cost of administration, the widow was entitled to one half of the estate, and the parents to the other half.
The Bettendorf Axle Company was incorporated on January 1, 1895, with a capital of $500,000; $100,000 in common stock, divided into shares of $100 each; and $400,000 in preferred stock, issued as a means of borrowing money. Whether any of the preferred stock was outstanding at the time of the transactions hereinafter referred to, does not appear; and, as such stock was not referred to in defendant’s propositions or argument, and as there was no suggestion of any mistake’s having been made in omitting its consideration from the court’s computation, it requires no further attention. Of the common stock, 355 shares had been issued to J. "W. Bettendorf, 2 shares to others, to qualify them to act as directors, and 643 shares to W. P. Bettendorf. The enterprise developed rapidly, under the masterful guidance of the decedent, and, at the • time of his death, the net value of the company’s property, after all deductions, exceeded $2,000,000.
"William P. Bettendorf was a man of inventive genius and marked constructive ability, a rare combination of qualifications for great enterprise. Throughout the growth of this company and development of the plant, he was the dominant and controlling spirit, even in matters of detail. He had begun life
“Transfer and set over to the party of the second part, and to its successors and assigns, the authority and license of applying and using the inventions and improvements described and claimed in any or all of said letters patent to the manufacture in the county of Scott, in the state of Iowa, and nowhere else, to the full end of the terms of said letters patent, respectively, of all kinds of wagons and wagon parts; also of all kinds of body and truck bolsters, car underframes, and car parts for railroad ears only, and to no other purpose; and of all of the aforesaid improvements in brake beams, and according to the designs as described and claimed in? said letters patent, respectively; and to sell the same in any foreign country so long as,
Nothing had been paid decedent under this agreement, though, according to the computation' of J. W. Bettendorf,$540,000 was owed him thereunder at the time of his death; while appellee contends that the royalties then amounted to $802,340.
Upon the petition of the plaintiff, J. W. Bettendorf was appointed administrator of the estate of decedent on June 8, 1910, and duly qualified. Though an inventory was filed, the appraisement was waived, at his instance, by the heirs of the estate. He was elected president of the company June 18, 191Ó, and, on July 9th, the widow and parents of the decedent entered into a contract with the company, by the terms of which the latter released a claim of about $122,000 which decedent had overdrawn on his salary and dividend account with the company, and the widow and parents relinquished all royalties mentioned. On the same day, the widow and parents transferred all letters patent held by decedent, and those applied for, to J. W. Bettendorf as trustee, with authority and obligation on his part to permanently license the company to make use thereof without exacting any compensation; and this he did immediately. These papers, of course, would not affect the relative proportions of the widow and parents in the patents and royalties; for the transfer enhanced the value of the stock in its entirety to the extent of the value of said patents and royalties, less the claim against decedent; but it resulted in increasing the value of the stock of J. W. Bettendorf to the extent of 355/1000 of such difference, for which he neither paid nor undertook to pay anything. In the latter part of May, 1911, he suggested to the plaintiff the purchase of her portion of the stock in the company; and, on June 1st, following, made a written proposal to pay therefor $431,252; and on June 7th of that year, she accepted this proposition, and on the same day, with the parents, in writing requested the defendant, as administrator of the estate, to make distribution of the shares and transfer the portion belonging to plaintiff, i. e., 321% shares, to her. On that day, the administrator so did, reserving the right, “if necessary or advisable, during the period of administration of said
The trial court found the plaintiff entitled to judgment for $471,929.86, recapitulating the items as follows:
“Par value common stock $100,000.00
Surplus at date of stock sale 2,422,285.35
Intangible value common stock 600,000.00
Gross value common stock $3,122,285.35
Deduct:
Account Shoal Creek investment 87,475.00
Net value common stock $3,084,810.35
Value plaintiff’s 321% shares 991,766.51
Deduct :
Sale price plaintiff’s stock $431,252
Amount paid Feb. 8, 1913, 50,000
One half of $122,000 overdraft 61,000
One half of $104,000 owed by estate 52,000
On value of house 68,000 662,252.00
329,514.51
Add benefit received by defendant’s 355 shares from plaintiff’s cancellation of royalties 142,415.35
$471,929.86”
l. Fraudulent conveyances: fiduciary rela* tionI. We first inquire whether plaintiff has been overreached in the several transactions involved; and, in doing so, it will be more convenient to take up the several transactions separately.
(a) We have discovered in the record no reasonable justification of the release or waiver by plaintiff of her interest in the royalties owed by the' company to the estate, without exacting from the defendant the payment of one half of the relative portion thereof which his stock bore to all the stock. It may be that the discharge of this large indebtedness was desirable, and possibly essential to the welfare of the company; but, to accomplish this, it was not necessary that plaintiff should make any contribution to the defendant, either directly or indirectly. For all that appears, had fair compensation been exacted of defendant for the benefit derived by him from such release, neither the company’s interests nor prospects would have been affected or impaired thereby. The royalties so waived amounted to $802,340. One half of this claim belonged to the plaintiff, or $401,170; and this was turned over to the company by plaintiff without other compensation than the enhancement in value of the 321% shares of stock held by her. In other words, Bettendorf received 355/1000 of this amount gratuitously, and solely on the specious pretense that the gift was essential for the protection of the Bettendorf Axle Company. The defendant computed the amount owed for royalties at $540,000. The discrepancy in amounts arises from different constructions of the contract between decedent and the company with respect to- the payment of said royalties. Reverting to the excerpt therefrom above, it will be observed that it provides that, unless the net earnings from all departments exceeded enough to pay a dividend on the preferred stock of
The contention of the defendant is that the 35 per cent is to be computed on the remainder, after paying interest on the preferred stock, or the earnings of all departments; while plaintiff says that the computation was to be madepn the net earnings derived from the railway department alone, after said payment of interest. That the latter is the correct construction seems too plain for argument. The language hardly could have been plainer than was employed. The “net earnings” are those which accrue “exclusively” from the railway department, and there is no room for construing the language to mean the net earnings from all departments. The evident design was to award decedent’s remuneration on the more valuable patents, and eliminate deductions owing to loss in other departments, — and there were such losses almost continually in the wagon department. The defendant was hardly excusable in making the computation of royalties on the net surplus or profits of all departments, and representing to the plaintiff $540,000 as the sum total of all royalties for which the company was indebted to decedent. In fact, they amounted to $802,340, and she waived or released her interest in this sum over and above the $122,000 the decedent had overdrawn, which constituted a legitimate claim by the company against the estate. One half of' this difference, or $340,170, plaintiff waived or canceled, and thereby enhanced the value of defendant’s stock to the extent of 355/1000 of this amount. As said, the record affords no reasonable explanation of the gratuity to Joseph W. Bettendorf, then administrator of the deceased husband’s estate and president of the company. Counsel for defendant undertake to defend this on the grounds that none of the royalties had ever been collected, nor had they
It will be observed that the amount of these royalties was represented to be $262,340 less than it really was, and that she was given to understand that payment thereof would jeopardize the credit of the company; that its business was poor, and the outlook otherwise not promising; and that she relied upon these representations. The defendant admitted that, upon signing the agreement, she remarked, “We must save the company,” and further on, he was asked:
“Well, what did she say, when you first presented the mat-. ter to her, as to her judgment about canceling the royalties and the royalty contract; what was her first attitude when it was first explained to her? A. Why, she was perfectly satisfied, as I stated before. She said that, in her judgment, as I explained it, that was naturally the only thing that could be done. ’ ’
Even though decedent had expressed the intention of canceling his claim to the royalties owed him, he had never done
That the patents were of great value to the company cannot be questioned. They constituted the basis of the enterprise, and enabled the corporation, issuing only $100,000 in common stock, to develop an enterprise which, during the five years previous to 1911, yielded an average net annual income of $660,283.33; and in eight years, assets of over $2,500,000 in value had accumulated. The defendant, then administrator of the estate, derived practically one third of the value of these letters patent without any compensation whatever. Their value will be considered in connection with that of good will. At that time, defendant was administrator of the estate, as well as president of the corporation. As such administrator, he held the legal title to these claims, and occupied a fiduciary relation toward the plaintiff. The existence of such relation be
2. Fraudulent conveyances: administrator and corporate president in fiduciary relation. II. As stated, the bulk of the estate of the decedent consisted of 643 shares of stock in the Bettendorf Axle Company, of which the widow was entitled to one half, and the parents of decedent to the other half. In the latter part of May, J. W. Bettendorf began negotiations for the widow’s portion of this stock, and, on June 1, 1911, submitted to her the following written statement of the assets of the company, and proposition to purchase:
“Bettendorf, Iowa, June 1, 1911.
“Mrs. Elizabeth H. Bettendorf,
“City.
“My Dear Sister-in-law:
“Pursuant to our conversation in the matter of my purchasing your common stock interest in the Bettendorf Axle Company, I make the following statement and proposition:
“The surplus and common stock as of date of January 1, 1911, of the Bettendorf Axle Company being........................$2,381,570
Deductions account depreciation, etc........ 536,305
Net surplus and common stock............$1,845,265
Your equity in the above as owner of . 321% shares of stock being....................$ 593,252
Less % the amount the estate owes the Bettendorf Axle Company and which I will assume and agree to pay approximately.. 52,000
$ 541,252
Deductions account of patent suits, part of your portion of the contingent liability.. 110,000
Net amount I offer to pay.................$ 431,252
In cash. ................'..........$150,000
By Shaw Land & Timber Co. note 50,000
By Allen & Watkin’s note ........ 60,000
Bettendorf Axle Company preferred stock .......................... 18,000
By my notes for 1, 2 and 3 years at 5% per cent per annum, secured by common stock of Bettendorf Axle Company, 321% shares as collateral-153,252
$431,252
“Respectfully submitted,
.“ J. W. Bettendorf.”
"“Bettendorf, Iowa, June 1, 1911.
“I hereby accept the above proposition and agree to the terms thereof. Elizabeth H. Bettendorf.”
It will be observed that this offer was but $30,082 more than the royalties plaintiff had gratuitously assigned to the company, to say nothing of the value of the patents. But she accepted the offer, June 7th; and, on the same day, the widow and parents filed written application to the defendant, as administrator, requesting him to distribute the shares of stock to which they might be entitled, after exacting a written agreement that, if the administrator “should find it necessary or advisable during the period of administration of said estate to sell any of said stock for the purpose of paying debts against said estate or for any other purpose whatsoever, that he, or his successor as administrator, may have the right to have possession of said stock. The first parties will upon demand deliver said shares of stock to said J. W. Bettendorf or his successor as administrator, or to pay value thereof to him or his successor upon demand. ’ ’ And on the same day, the plaintiff transferred her 321% shares of the capital stock of the company to the defendant.
The' record satisfactorily discloses that the price paid by the defendant' was inadequate. The plaintiff was without information concerning the company’s affairs, was unaware of the extent of its property, or what it had been earning and had in prospects in the business world. The defendant was fully
On February 13, 1911, the directors, on motion of Yoss, had increased the salary of the defendant as president from $12,000 to $18,000 per annum. Surely, this was done in recognition of his ability and the services he was rendering, and bespoke the confidence not only of Yoss but of the other directors.
The defendant and others organized a corporation known as the Bettendorf Company, with capital stock of $7,500,000; and, on December 30, 1912, it, by its president, Joseph W. Bettendorf, filed application with the executive council for permission to issue capital stock in said sum, $5,000,000 in common stock and $2,500,000 in preferred, at 7 per cent cumulative, nonparticipative stock, representing that it had purchased the property, assets, and good will of tho Bettendorf Axle Company at the price of $7,500,000, to be represented by the par value of the stock hereinbefore mentioned; that the factory, shops, and machinery were appraised as of date, February 1, 1912, by the American Appraisal Company, together with its balance sheet at the close of business November 30, 1911, and included the following “classified statement of assets:”
“Foundry, shops, power plant, other buildings, including machinery and appliances (see Exhibit A) ....................$4,000,000.00
Real estate occupied by present plant, approximately 96 acres (see Exhibit B).. 192,000.00
Investments in bonds and stocks (see Exhibit D) ............................ 156,829.00
Patent development (see Exhibit E).... 61,902.00
Quick assets, consisting of material finished and in process of manufacture:
Cash, bills receivable, accounts receivable ...............$2,155,848.00
Less actual liabilities ...... 1,189,603.00
Net (see exhibit F) .................. 966,245.00
Total .............................$5,521,976.00
Patents, patent licenses and good will (see Exhibit G) ..............'...........$1,089,713.00
Value of $15,000,000.00 of orders booked for 1913 delivery (see Exhibit H).... 1,300,000.00
Total .............................$7,811,689.00”
The petitioners represented that “the officers are thoroughly familiar with all the property, assets, letters patent, and good will of the Bettendorf Axle Company, and that it is in their judgment and belief that the said property and good will are fully worth the valuation as hereinbefore shown.” This was sworn to by the defendant and Voss, saying that:
“We are familiar with the property, assets and business of the Bettendorf Axle Company of Davenport, Iowa; that we have each read the foregoing application of the Bettendorf •Company to the Executive Council; that we have knowledge of the value of assets, property, patents and good will as classified and set forth in the foregoing application and that the values thereof as shown in the foregoing application are true and correct to the best of our knowledge and belief.”
To this were attached certain schedules and estimates of values of the accepted property and good will.
From the evidence submitted, the executive council found the property to be of the value of $8,689,603, and that the out
3‘ fueXWciarations as to value. Of course, the value of the plant must be ascertained as of the date of the sale of the plaintiff’s stock, and subsequent enhancement of values cannot be taken into account as bearing thereon. But this does not preclude the consideration of subsequent declarations by defend-a;Qt an¿ y0SS; as bearing on the good faith and correctness of their previous representations to plaintiff, especially when there was no substantial -increase in the physical estate. If .the outlook for this was so unpropitious when plaintiff sold her stock, it must have brightened rapidly after defendant acquired it; otherwise, Voss could not have brought himself to have pronounced the condition of its finances very favorable, little more than a month later, nor, in view of his anxiety over the indebtedness for royalties, could he have consented to the voting of a dividend of $300,000 out of its assets, about $96,000 of which must have gone to plaintiff, but for the transfer, and, in less than a year and a half, swear that the plant was worth $7,500,000!
The explanation sought to be made is that these values were exaggerated, in order to obtain acceptance of the property equivalent to cash in the organization of the company; and, of course, there is no established criterion for estimating values of property. Between the low and top values, even when fairly estimated, there may exist honest differences of relatively large amounts. But where the estimates of practically the same property, at periods scarcely more than eighteen months apart, vary as one to three, or, in other words, the property is sworn to be worth three times what it was earlier represented to be, without suggestion of any cause for the increase, the mere difference of opinion as to value, or swelling estimates thereof for a purpose, furnish no adequate explanation. It is inconceivable that reputable citizens, even though possessed of large means, would thus exaggerate values of property on oath, even though this were done to induce those in authority to authorize the acceptance of property as equivalent in value to cash, in payment for the
Reverting to defendant’s letter, it appears that he there represented the surplus and common stock, when that was written, to be $2,381,570; but, on July 11th following, Yoss, in his motion that a 300 per cent dividend be declared, represented, that the surplus alone was $2,422,285.35; and there is no pretense that this increased amount was due to additions made in the intervening 40 days. If to this is added the $100,000 par value of the common stock, the value of the property, as estimated by Yoss at this meeting of the directors at which the defendant presided, was $2,522,285.35, or $140,715.35 more than defendant had stated such value in his letter. The figures probably were furnished by defendant to the directors, of which Yoss was one, for defendant only was familiar with the books, and, in any event, the inference from his having accepted the dividend on this motion without protest warrants the conclusion that he approved the same. The discrepancy is nowhere explained satisfactorily. Again, in the letter, $536,305 is deducted on account of depreciation. The defendant testified that this was arbitrarily determined as the amount, and that he gave the figures making up this amount to Mr. Yoss. His examination on the subject is quite illuminating. It appears that the company had purchased 186 acres of land east of its foundry, up to Duck Creek, and an old stone crusher, for which it had paid $160,000. The defendant computed $80,000 as a part of the above deductions on account of this real estate. He admitted that it was. desirable to retain this land for the future development of the company, and his only explanation is that, as it was not required for immediate use, and was being leased at a low rental,- he thought it ought not to be computed at the value paid. Notwithstanding this, and although the property had not increased
It appears that, when the company purchased malleables, more than required for the particular job were bought, in order to meet emergencies of breakage and the like, and accounts thereof were carried in what was called surplus stock. After being carried for several years, they were put in the scrap heap, as new material came in. Deduction of $25,000 or $30,000 was made on this account, and without any investigation as to its .correctness.
$25,000 was deducted on account of what is known as the Shoal Creek Company investment, consisting, as we understand it, of about $60,000 in bonds and stocks. There is no basis for determining the measure of discount which might properly have been made. The Bettendorf Improvement Company had been organized to purchase lots and to build houses for the employees of the company, and to handle the property. $92,529 was the amount so invested in stock, being issued at the par value of $100 per share for that amount. The deduction on this account was made on the apparent theory that defendant would not know whether the company would ever get all its money back. $33,000 was charged off on account of the Sargent car, though it was listed in the application to the executive council, and transferred to the new company at the price of $54,2(^6.35, to which both the defendant and Voss testified, as being a, fair value. Otherwise, this item has no explanation.
Again, the company had been conducting “a, big test,” to demonstrate the “rigid versus the flexible truck.” Its competitors had undertaken by test to demonstrate that the company’s principle of truck construction was wrong, and this test was made to counteract the effect of that made by them; and it was expending or expecting to expend certain sums of money on account of these tests. Manifestly, all this was done to aid in the future disposition of the company’s output, and was not appropriate matter for deduction of $20,000 or $25,000. Other items were even more questionable. Indeed, defendant paid no
The statement of the financial condition of the company of June 30, 1910, has a deduction of $929,419.13 as “reserve for depreciation,” and it would seem to dispose of the items alluded to, especially that of the deduction “on account of the plant.” We do not animadvert on the necessity of taking into account depreciation in estimating the value of going concerns. Every well-conducted factory or manufacturing company should make provision to cover wasted property and losses through exhaustion or obsolescence. If book deductions are too great, this is of little concern to the shareholders. Though the effect is to reduce dividends, actual value is not impaired thereby, and the surplus is increased. The amounts of deductions charged off a company’s books, then, furnish little aid in ascertaining values. Depreciations other than those accepted by the trial court were without warrant, as must have been known to defendant, who was familiar with the books of the company.
The item of $52,000 was one half of the amount which had been withdrawn by decedent for the construction of his home, and was properly deducted. It will also be observed that $110,-000 was deducted on “account” of patent suits, “part of your portion of the contingent liability.” This item does great
4’ raio^foS^cSmputation. The element of “good will” is entirely omitted from defendant’s statement, as is the value of the patents. His explanation of the exclusion of these items but emphasizes the fact that his entire aim was to mislead as to the value of the stock, and that he felt himself under obligation to make a fair statement of the condition and property of the company. Indeed, Voss describes the transaction as dealing at arm’s length. That good will is an element of value proper to be taken into consideration in ascertaining the value of a going concern, is well established. Millspaugh Laundry v. First Nat. Bank, 120 Iowa 1; Iowa Seed Co. v. Dorr, 70 Iowa 481; Thompson v. Winnebago County, 48 Iowa 155. See Crichfield v. Julia, 147 Fed. 65. The value of good will varies with the facts of each particular case, depending on the extent of the use of the trade name, the stability of the business, consistent earnings, the character of the organization, the reputation of the concern, the personality of the manager, the possession of valuable patent rights, and all other elements which make for excess profits over and above a fair return on the capital stock invested. Moore v. Rawson, 185 Mass. 264 (70 N. E. 64); Rowell v. Rowell, 122 Wis. 1 (99 N. W. 473); Feige v. Burt, 124 Mich. 565 (83 N. W. 367); Moffit v. Hereford, 132 Mo. 513 (34 S. W. 252). It is always difficult to estimate the value of the good will of a business, and impossible so to do with accuracy. The following rule seems to have been approved by the courts of New York: (1) Determine the average annual net earnings of a fair and representative number of years; (2) determine the average annual net investment over the same period; (3) deduct from the average annual net earnings a fair interest return on the average annual net investment,
In 1906 ......................$ 452,176.58
In 1907 ...................... 586,079.80
In 1908 ...................... 278,740.49
Jn 1909 ...................... 1,134,276.50
In 1910 ...................... 850,144.30
Dividing the total amount of the several sums by the number of years, we have the average annual income of $660,283.55.
After deducting 7 per cent on the average investment, there would remain over $500,000 of the average annual income to be capitalized. Of course, such a computation is not conclusive, for other circumstances may have bearing on the productivity of the corporation, and its salability. Thus it appears that th§re was local uncertainty as to the future of the company; but its dealings were not local, save with the banks. Its credit with them appears to have been unimpaired. As one of the witnesses expresses it, “the railroad world was at a low ebb,” early in 1911, but more of the company’s share of orders was obtained later-on. The business of furnishing supplies for railroads is shown to be subject to changing conditions of the companies, • and varies greatly from year to year. The year was concededly a bad one until after July, and this may have affected the outlook of the enterprise. All these matters should be taken into consideration in estimating- the value of the good will and
The record furnishes no basis for estimating the Value of the perpetual use of the patents, save the income earned in the plant; though defendant and Voss, in their representations to the executive council, fixed their value at $1,089,713. Of course, this was 18 months after the sale, and their value may have been greatly enhanced in the meantime by the receipt of large orders; or the statement might have been intended to mislead the executive council. Surely, the perpetual use must have been worth something. At any rate, there was every reason to believe, in June, 1911, that the company would continue in business and continue to earn a large income, not only on its tangible, but on its intangible property as well ;• and we are of the opinion that the valuation of the good will and perpetual use of the patents at $600,000 by the trial court was very moderate. But for the peculiar situation at the time, the depression in business and other matters referred to, we should be inclined to largely increase the amount. The majority are not inclined to do so, and for that reason, we shall not interfere with the finding of value as made by the trial judge.
III. During the period when the contracts concerning the royalties and patents were entered into, and the plaintiff’s por
‘ ‘ Our Code expressly recognizes that an executor or administrator is a representative of the estate, and stands in law on an equality with a trustee of an express trust. ’ ’
See, also, Lampman v. Lampman, 118 Iowa 140; 11 Am. & Eng. Encyc. of Law (2d Ed.) 986; Cole v. Stokes, 113 N. C. 270; Herriott v. Potter, 115 Iowa 648. An executor or administrator, in dealing with the estate and with those interested therein, is regarded as a trustee, and, as such, is subject to the principle which raises a presumption of fraud against him when he undertakes to purchase the trust property from his cestwi que trust. Counsel for defendant seek to avoid the application of this rule by saying that the widow’s portion of the stock had been distributed prior to its purchase by defendant. The record is to the contrary. All the negotiations occurred prior to June 7, 1911.
His written proposition to purchase was dated the first of that month, though Voss thought it was made earlier, and defendant fixed the date later. There is no dispute, however, that the acceptance was on the 7th; and, though the application of the widow and parents to the administrator for distribution, and his agreement thereto and the assignment of the stock, were dated on the same day, in the absence of any explanation, it may well be presumed that these occurred in the natural course of things, and therefore that the application for and distribution and the assignment of the stock took place subsequent to the negotiations. This is true, or else all these occurrences were part of the same transaction. In either event, defendant had not shaken off his trust relationship, prior to the purchase of the stock. Even were the proposition to purchase accepted after, but on the same day that the distribution occurred, the law would scrutinize with great care the transaction, in order to see to it that the cestui que trust had not been overreached. Tuche v. Buchholz, 43 Iowa 415.
“If the market or contract price of the stock should be different from the book value, he would be under no legal obligation to call especial attention to that fact; for the stockholder is entitled to examine the books, and this source of information, at least theoretically, is equally accessible to both.”
This does not mean that an officer of a corporation may take advantage of a stockholder whom he knows to be uninformed concerning the condition of the books, and who is without appreciation of what they will disclose, and who is relying upon his statement of such conditions, which is misleading in what it contains, as well as in its admissions. Such deception is quite as much to be condemned as that of withholding facts not appearing in the record; and, under the facts of this case, the doctrine as to the existence of the trust relation between officer and shareholder is quite as applicable as in the Dawson case. "Whether the defendant be held to the obligations of a trustee on the theory that the trust relation arose from his relation as administrator of the estate of the decedent, or from his position as director and president of the company, he owed to plaintiff the duty of dealing with her in absolute good faith. Because of relationship, the transactions reviewed are presumed to have been brought about by undue influence, and the burden was
“With respect to adequacy of consideration, no unbending rule applicable to all cases can, be framed, because there are classes of cases which have features which prevent the operation of a fixed rule. The leading text-writers speak of adequacy of consideration as essential. See 1 Perry on Trusts, Section 195; 2 Pomeroy’s Equity Jurisprudence, Section 958; 1 Story’s Equity Jurisprudence, Section 311. Compare, also, Grosvenor v. Sherratt, 28 Beavan 663; Edwards v. Meyrick, 2 Hare *70; Boyd v. Hawkins, 2 Dev. [N. C.] 329, 331; Coffee v. Ruffin, 4 Coldw. [Tenn.] 515; Rose v. Mynatt, 7 Yerg. [Tenn.] 30; Kisling v. Shaw, 33 Cal. 425; Rubidoex v. Parks, 48 Cal. 215. But this is too sweeping. For there may be cases in which no valuable consideration at all is necessary. Thus, while a gift from a cestui que trust to his trustee is exceedingly difficult to sustain (see Hatch v. Hatch, 9 Ves. 292), it will, in proper cases, be upheld. See Hunter v. Atkins, 3 Mylne & K. 113; Harris v. Tremenheere, 15 Ves. 34, 39; Marshall v. Stephens, 8 Humph. [Tenn.] 159. The principle upon which such cases rest is, that it was the intention of the cestui que trust to part with his property without consideration; and, if a court of equity can clearly
There was no evidence that, in making the deal, the plaintiff was aware that the price was inadequate. On the contrary, she was assured that it was all the stock was worth. There is no escape from the conclusion that the price was inadequate, and that the defendant omitted important matters from His statement, and included those that should not have been mentioned, and that plaintiff was induced thereby, without knowledge of the facts and the value of her stock, to part with it to defendant.
.5. fraudulent puTOhaIeWbyS: fiduciary: roiianee of third , .Party-IV. The appellant contends, however, that the widow acted on the advice of C. N. Voss, and entirely disconnected herself from any reliance on the defendant. The fact of having obtained the independent advice of a third party d°es not alone obviate the presumption of the exercise of undue influence. It is merely a cir- * cumstanee tending to show the “uberrima fides”
The record has not convinced us that Mr. Voss was in a situation to act as independent adviser with reference to the sale of the stock. He was not so disassociated from the interests of the trustees that he could well actn impartially, and solely in the interest of the cestui que trust. He was asked whether he had acted as “a sort of financial adviser of J. W. Bettendorf after the death of his brother, ’ ’ and answered in the affirmative. Nor does it appear that he had information other than that furnished by the trastee, on which to base his advice, save that coming to him as a creditor of the company, and as financial adviser of the defendant. Nor did he assume to base such advice as he gave on anything other than statements furnished by defendant, and the latter’s written proposition to the widow. These were made out in response to his request for statements as to the condition of the company. Doubtless he had ascertained other matters as director of the company, and as financial adviser of the decedent and subsequently of defendant, but only in a general way, as bankers usually keep in touch with the trend of a debtor’s business affairs. The record leaves no doubt that he made no personal investigation of the books or affairs or property of the company, but relied on the statements, including that contained in the written proposition, as did the plaintiff. Voss testified that, after some parley about arbitration, the plaintiff 'requested him to act for her in these negotiations; that he had many conversations with defendant, including some concerning deductions, and reported all of these to plaintiff, arranged with defendant that she should have the house, which was being constructed, for $65,000, instead of the $180,000
“I have been reasonably conversant with, the affairs of the company for years and having carefully gone over the statements made by J. W. B. in connection with his proposition and offer for your holdings made to you now, and fully recognize the uncertainties, fluctuations, and risks naturally attached to the business carried on and furthermore considering the fact that you are a minority stockholder, have no hesitation to recommend and advise you to accept his offer for the purchase of your interests. The price offered may be low and the deduction from book-values insisted upon by Mr. B. may be excessive, in fact, future results may and it is to be hoped will demonstrate that it might have been better for you not to have sold. On the other hand, the amount which you will realize is a large fortune, and properly and safely invested will yield a nice income. A sale surely relieves you of tremendous and continued risk and anxiety, and it is for this reason mainly, and the further reason that you yourself can hardly expect to have a voice in the future management of the company that I have advised you to accept the offer.”
On cross-examination, the plaintiff testified that she did not remember of ever having seen the original of this letter, until shown her at the trial. Even if she did, — and we are inclined to think it came into her hands, — it gave her no information as to the facts, and indicates that he possessed only figures fur
Voss has been the financial adviser and friend of W. P. Bettendorf, and, upon his death, became such adviser of the defendant. Upon the latter’s request, he succeeded decedent as a director of the company, and his first service in that capacity, apparently, was to advise the cancellation of its obligation to decedent’s estate for royalties owed it by the company, estimated by defendant at $540,000, but, in fact, amounting to over $800,000; and that it be relieved from the payment of royalties on patents thereafter. According to his testimony, the alleged intention of decedent to cancel the indebtedness for royalties was explained to plaintiff, and “she replied that she knew,” and that, concerning its effect on defendant’s interest, she remarked: “Well, poor Joe, upon whom the whole load, — he has got to bear the burden of the business and ought to have that little advantage,” — the small sum being $284,830.70, or á contribution by her of one half of this amount, or $142,415.35! Voss must have known that, whatever may have been the intention of decedent as to making such a gift, he had not done so, and that the'widow was under no obligation to carry it out; and that, whatever the explanation to her, she did not appreciate the amount owed, or the benefit being conferred on defendant. This was the first manifestation of the interest of Voss in the affairs of plaintiff! The second was in inducing her to part with all royalties on patents to be earned in the future, and perpetually part with their use. Talk of benefiting the credit of the company was well enough, but doing that did not necessitate contributing to.the wealth of defendant of hundreds of thousands of dollars. It would seem that, to a real friend of this widow’s, it would have occurred that fair compensation might have been exacted from defendant for a just proportion of royalties owed and to be earned in the future, in relieving the corporation of its burden of indebtedness.
Again, Voss knew that the letters patent had been assigned defendant and permanently licensed to the company, and were at the foundation of its great earning capacity; and yet he recommended the sale of the stock, without taking into consid
“Did you think, at the time you accepted this offer to purchase your stock, that the offer placed upon the stock in this letter was all the stock was worth, according to Mr. J. W. Bettendorf? A. Why, I placed confidence in him to give me the right figures. I had no reason to doubt him, and no reason to disbelieve him, because I knew nothing. Q. Did you have anyone go over the books of the company for you? A.- No, I did not. Q. Did you consult an attorney or anyone ? A. No, sir, I did not. Q. At any time, from the death of your husband down -until the time you signed this paper accepting his
Then follow the inquiries concerning the arrangement whereby she was to be released from the agreement under which she was to pay $180,000 for the house, and whereby she paid only $65,000 for it, and she testified that she did not think this was.conditional upon the purchase of the stock; that she then supposed that she was entitled to the house as widow of the decedent ; and that she accepted the figures that were put before her.
‘Q. For what did you accept them? A. For my right, what was coming to me for the right of the estate, and for the
This evidence as a whole indicates very satisfactorily that the plaintiff, in selling her stock, relied upon the representations and computations of the written proposition of defendant; and that throughout the transaction, she reposed quite as much, if not moré, confidence in the defendant than she did in Mr. Voss. The former had been the close associate of his brother during many years, and enjoyed his entire confidence; and it is manifest from this record that the plaintiff relied entirely upon his integrity, and believed that he did have due regard for her interest in all the transactions between them. She had parted with her share of the claim to the royalties because of her confidence in him; she had signed contracts which avoided any liability for the future use of the patents on the part of the company; and, when he spoke to her about purchasing her stcfck, nothing had occurred to impair this confidence. She accepted his statements as correct, and, in dealing with him, relied upon him to tell her what the stock was worth, quite as implicitly, if not more so, than she did on the advice of Voss. The defense that confidence reposed in defendant was superseded by reliance on independent advice, was not made out.
6 compromise ment*b asking part of a fraud. V. Upon the filing of articles of • incorporation of the Bettendorf Company, articles appeared in the local newspaper, commenting upon the new $7,500,000 corporation and the reasons f°r the organization, and describing it as. the largest incorporated company in the state, T]j.e plaintiff noticed these on the last day of the year 1912, and thereupon went to the office of Lane & Waterman, in Davenport, for the purpose of employing Mr. Lane; and, as he was away, she called on Mr. Voss, on the following day, in order to talk with him about the matter, and asked him to explain where ‘ ‘ all this money came from in such a short while,— the $7,500,000 for the company that was formed.” Voss, in response, referred to the $15,000,000 order which the company had taken, and stated that “there is always a lot of water con
“Wherever a confirmation would itself be subject to the same objections and disabilities as the original act, a transaction cannot be confirmed and made binding; for confirmation assumes some positive, distinct action or language, which, taken together with the original transaction, amounts to a valid and binding agreement. * * * If the party originally possessing* the remedial right has obtained full knowledge of all the material facts involved in the transaction, has become fully aware of its imperfection and of his own rights to impeach it, or ought, and might, with reasonable diligence, have become so aware, and all undue influence is wholly removed, so that he can give a perfectly free consent, and he acts deliberately, and with the intention of ratifying the voidable transaction, then his confirmation is binding. * * * If, on the other hand, the original undue influence still remains, or if the act is simply a continuation of the former transaction, or if the party wrongly supposes that the original contract or transaction is binding, or if he has not full knowledge of all the material facts, and of his own rights, no act of confirmation, however formal, is effectual; the voidable nature of the transaction is unaltered.”
Defendant contends, however, that the facts, as cited above, were sufficient to put her on inquiry, and that, had she followed up such clues as she knew of, she must have ascertained all the facts bearing upon the value of the shares of stock sold, and that, for that reason, she failed to act with reasonable promptness in bringing her action to rescind the contract of settlement.
Mere suspicion is not alone sufficient to put a person on inquiry. Such feelings .as were excited in her were satisfied by Yoss in explaining that earnings had been added and the stock
The deduction of $110,000 on account of the patent suits had been talked of by Yoss, as both she and her son testified, previously to her reading the article in the local paper and her talk with Lane. Only this item was discussed, but undoubtedly she asserted, in substance, that she made no other claim; for she was then ignorant of any facts entitling her to -assert any, consequent on the indirection of the defendant in other respects. She was no better informed concerning the fraud practiced by not making full disclosure of all the facts, — as was exacted of defendant, both as administrator and president of the company, in buying the stock of her, — than at the time of the transaction. If her suspicions had been aroused, they had been pacified by Yoss; and we have discovered in the record no clue which can be said to be such as would have put an ordinarily prudent person on inquiry. As said, mere suspicion is not enough, and she had no more than this at the time of entering into the alleged settlement, and even that was fully pacified. In these circumstances, the plaintiff must be held not to have estopped herself, by entering into the contract, from claiming damages consequent on the fraud perpetrated on her as widow and stockholder. It was not until she met the lawyer who had prepared all the instruments relating to the patents in the fall of 1914 that she seems to have given any thought to the matter. As a result of this interview, Thomason, an attorney, was employed by her to investigate, and advise her as to whether she had any claim against the defendant. He did so, and reported, in the early part of 1915, that she had “a good lawsuit;” and this action was begun in May following.
The Bettendorf Axle Company had transferred all its stock to the Bettendorf Company, newly organized in 1913, and the stock had been issued on February 23d of that year. No one could well pretend that she, as a person of ordinary diligence, must have asserted the facts prior to that time; and between that time and the beginning of the action the defendant’s situation does not appear to have been changed, and such delay as there was, was not inimical to his interest. It may be that plaintiff was not fully advised, even at the time of beginning the
tracts • af ‘ firmance in toto sión in toto01(?): exception. VI. The court appears to have canceled that part of the contract of settlement which transferred plaintiff’s interest in the letters patent, and to have confirmed that portion which re^ate^ the settlement of the $110,000 deduction, because of suits pending relating to the patents; and it is argued that it was without power so to do. Reliance is placed upon Allen v. Pegram, 16 Iowa 163, where, in an action at law, the court refused to permit a party to rescind in part and sue for damages. Here, plaintiff asked for the cancellation of the entire contract, and also that an accounting between the parties be had, and the true value uf the patents be ascertained, and for such other relief as might seem proper. The evidence disclosed that it was impossible to put the parties in statu quo■, as the interest of other parties had intervened, and therefore the transfer of the patents was allowed to stand, and defendant was required to account for the value when transferred. The assistance of the court in rescinding was invoked, and it was endowed with authority to enter such order as might be just to the parties. The principle is well stated in Mills v. Morris, 156 Vis. 38 (145 N. W. 369).
‘ ‘ Though, in general, one may not affirm in part and rescind in part, the rule is equitable, and ceases to operate where equity requires it to do so, as indicated in Gay v. D. M. Osborne & Co., 102 Wis. 641 (78 N. W. 1079), Ludington v. Patton, and other cases. One must distinguish between situations where equity requires the rule to apply, and where it requires an exception; and also' between an action for rescission and one based on re-" scission; also, between an action for rescission and an action to prevent injury where rescission would not furnish an adequate
' ‘ ‘ The right of rescission of a contract for fraud, though a legal right, is based on equitable principles. Therefore, the requisites of its exercise should go no further than strict compliance which the dictates of good conscience requires. For that reason, the exception to the rule of total rescission indicated has become a part of our jurisprudence.’
“A proper conception of the real ethics of the law will enable, one to perceive that rules are based on principles of justice and are limited by the effects in that regard. Therefore, when it is said that application of a rule to a particular situation would work injustice instead of justice, especially where the controversy is being dealt with in equity, wisdom will lead one to search for some recognized exception to fit the case, and, if none of the particular character can be found illustrated, to classify the circumstances within the broad principles'that rules based on supposed necessities of justice are not to be applied beyond their reasonable scope.”
8‘ not^necéssary^to pIead‘ VII. Finally, counsel for defendant contend that the plaintiff, in order to maintain the action, must have tendered the return of the $50,000 in preferred stock received by her, in consideration of the execution of the contracts of February, 1913; and that as no such tender was pleaded in the petition nor shown by the evidence, the petition must be dismissed. Were this an action at law, there would be much force in their argument. The matter of such a tender relates to the remedy, and involves the rule that one asking equity must show his readiness to do equity. The omission of such a tender was apparent on the face of the .petition, and the omission was not referred to by demurrer or answer; and, according to the defendant’s brief, the defect/ if such it was, was not mentioned in the trial court. This latter contention is somewhat confirmed by the omission of any refer
A like question was raised in Ormsby v. Budd, 72 Iowa 80, where the court says:
“Defendants insist that, as plaintiff fails to tender, or offer to pay, in his petition, these several sums, thus putting defendants in statu quo, he is not entitled to any relief. Upon this point, it is sufficient to say that defendants do not set up in their answer the failure to tender these sums as a defense.”
And further on:
“Defendants also insist that plaintiff’s offer to retransfer the stock is not sufficient. But no objection of this kind was raised by. the pleadings, or urged in the court below, so far as we are able to discover. Plaintiff, in his petition, does not offer to make the transfer of the stock. We discover no prejudice which can result to defendant, if plaintiff file with the clerk of the court proper assignments of the stock certificates, before the reconveyance to him of the lands is made by defendants, or before the deeds to defendants are canceled. The decree should so provide. ’ ’
The point is touched upon in Schneider v. Schneider, 125 Iowa 1, where the contention was that a tender in open court alone was not sufficient. The court held otherwise, saying that:
“In equity, a willingness and readiness to do an act is all that is required; and, if the plaintiff be otherwise entitled to relief, the court will not deny it simply because no profert in evidence has been made of the subject of the tender, but will, by its decree, if it be deemed necessary for defendant’s protection, require the act to be done before the relief becomes effective. ’ ’
See, also, Clapp v. Greenlee, 100 Iowa 586. The doctrine is that, in case of a contract’s voidability upon the ground of fraud, the injured party must totally rescind it, and restore to
“If the complaint had not been so framed as to show such willingness, the defect could only have been reached by a demurrer for insufficiency on the particular ground that a cause of action in equity was not stated for the reason that plaintiff failed to show a willingness to do equity. Taylor v. Fulks’ Admr., (Ky.) 29 S. W. 349; Ormsby v. Budd, 72 Iowa 80; and Newman v. Smith, 77 Cal. 22.”
The record leaves no doubt that the preferred stock was
version by fiduciary. VIII. The trial court allowed interest on $142,415.35, charged defendant for benefit derived from the cancellation of royalties by plaintiff from date thereof, July 9, 1910, but denied interest on the additional $329,514.51 found due on sale of stock, June 7, 1911. The defendant acquired plaintiff’s stock at that time, and has since enjoyed all the advantages of its ownership, and so manipulated it that restoration is impossible. There seems no good reason for denying plaintiff compensation for the use of the money which she should then have been paid for the stock, and which, through deception, defendant avoided paying. What happened was tantamount to the conversion of the deficiency in the purchase price by defendant in his trust capacity, and is clearly within the rule which includes interest from the date of conversion as part of the damages allowed. See Doyle v. Burns, 123 Iowa 488; In re Estate of Young, 97 Iowa 218; Hook v. Payne 14 Wall. (U. S.) 252; Ludington v. Patton, 121 Wis. 649 (99 N. W. 614)., The award is merely for the difference between what the fiduciary actually paid and what he should have paid for the stock; and simple interest thereon at the legal rate is not only just, as he has enjoyed the income from the stock, but adequate, inasmuch as the cestui que trust intentionally parted with said stock. The court erred in not including interest at the rate of 6 per cent per annum from June 7, 1911. The decree will be so modified as to require the deposit of the $50,000 worth of preferred stock received by plaintiff, together with dividends received thereon, with the clerk of the district court for defendant, immediately upon the deposit by him of $50,000 with that officer, with interest thereon at the rate of 6 per cent per annum from February 13, 1913, for the use of