Case ID: ny-super-ct_36/html/0544-01.html
Source: Caselaw Access Project
Author: {"author": "By the Court.—Freedman, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

PETER NELSON, Plaintiff and Appellant, v. CHARLES LULING et al., Defendants and Respondents.
    Before Barbour, Ch. J., and Monell and Freedman, JJ.
    
      Decided December 31,1873.
    In an action against the incorporators and directors of an ocean steam navigation company, when the defendants are charged :
    First. With fraudulently and corruptly combining to organize said company for the purpose of deceiving such of-the public as might be induced to become stockholders therein.
    Second. With inducing the plaintiff by false and fraudulent representations to purchase twenty-seven shares of the capital stock of the par value of one hundred dollars each.
    The plaintiff must satisfactorily prove that the representations were falsely and fraudulently made ; that is to say, that they were not only false in fact, but that they were made with the intent to deceive.
    This intent may be inferred from evidence showing that the party making them knew of their falsity at the time, or at least professed knowledge of their truth, when in point of fact he was conscious that he had none. But in either case falsehood uttered with intent to deceive is essential.
    
    The presumption is in favor of innocence, and on that account the intent or design to deceive the plaintiff must be affirmatively made out by evidence (Wakeman v. Dailey, 51 N. Y. 27; Chester v. Comstock, 40 N. Y. 575, 576 [note]; Marsh v. Faler, Ib. 562; Weed v. Case, 55 Barb. 547).
    Appeal from a judgment.
    
      The facts and points in the case appear fully from the opinion of the court.
    
      Edward D. McCarthy and George W. Van Slyck, for appellant.
    
      T. C. T. Buckley and Jas. K. Hill, for respondents Luling, Taylor, and Calkin.
    
      James P. Lowrey, for respondent Bellows.
   By the Court.—Freedman, J.

This is an appeal by plaintiff from a judgment entered upon the dismissal of his complaint at the trial before the court and a jury. The action was brought against the defendants as incorporators and directors of a company formed, pursuant to the general laws of the State of New York, for ocean steam navigation, under the name of “ The New York and Bremen Steamship Company; and the complaint charged them, first, with fraudulently and corruptly combining to organize said company for the purpose of deceiving such of the public as might be induced to become stockholders therein; and secondly, with inducing, by false and fraudulent representations, the plaintiff to purchase twenty-seven shares of the capital stock of the par value of $100 each.

The evidence showed that the plaintiff was originally a stockholder and creditor for work done of a steamship company called “The North American Lloyd,” which owned three steamships, named Atlantic, Baltic, and Western Metropolis, for which the sum of $965,000 had been paid or secured to be paid. None of the defendants were stockholders in this company except Calkins ; but the Pacific Mail Steamship Company held a first purchase-money mortgage on the Atlantic and Baltic, and the defendant Charles Luling, on behalf of his house here and some of his correspondents abroad, was a large creditor, and as such held subordinate mortgages upon the three steamships. In the fall of 1866, in consequence of the German war, the company failed with liabilities amounting to about $1,400,000, and Calkin was appointed receiver. Among the said liabilities was one of $5,000 to the plaintiff, which was entirely unsecured.

Luling and the Pacific Mail Steamship Company then determined to foreclose their respective mortgages in order to acquire a title which would be not only absolute upon its face, but would also be free and clear from the claims of the general creditors of the North Amer-can Lloyd. This was accordingly done, and the three steamships were sold and bought in by the defendant Taylor, in their interest and on their behalf. Their further design in doing this was to form a new company, into which the said steamships were to be put, and the shares of which were to be divided between Luling and the Pacific Mail Seamship Company in certain proportions, as provided by a written agreement entered into for that purpose.

In pursuance of such agreement, the New York and Bremen Steamship Company was formed, with a capital stock of $1,000,000. This stock was subscribed for by seven persons, as follows: Francis Skiddy, $5,000; Charles Luling, $140,000; F. W. G. Bellows, $5,000; John T. Hanneman, by Charles Luling, $5,000 ; Harvey C. Calkin, $5,000 ; James K. Hill, $5,000 ; Isaac Taylor, $835,000. They met, and they executed, and on the 24th of January, 1867, filed a certificate of incorporation as required by statute, and the defendant Taylor was elected president and treasurer.

To this company Taylor offered to sell the three steamships in question for $1,000,000 in cash and the assumption by the company of the payment of the claims held by Luling and his correspondents against the North American Lloyd and the Steamer Western Metropolis, less $150,000 subscribed by Luling for himself and Hanneman for the stock of the new company. This offer was accepted by the board of directors of the company, and Taylor as treasurer was directed to pay to himself individually the said sum of $1,000,000, upon the receipt of a conveyance of the ships. The conveyance was made, and the manner in which the subscriptions were paid in and the money paid over to Taylor was as follows: The Pacific Mail Steamship Company, undertaking to pay for the subscriptions of Taylor, Calkin, Skiddy, and Bellows, handed to Taylor on four separate occasions between the 30th of January and the 20th of February, 1867, checks to the aggregate amount of $850,000. As each check was received it was deposited .by Taylor in bank to the credit of the company, and thereupon a check for an equal amount was drawn by Taylor as treasurer to his own order, and that was endorsed and delivered by him to the Pacific Mail Steamship Company. Luling, undertaking to pay for his subscription and that of Hannesnan and Hill, on the 23d of January, 1867, handed to Taylor a check for $150,000, which was also deposited by Taylor in bank to the credit of the company, and out of the proceeds of which $110,000 were paid to Duncan & Sherman, in satisfaction of a mortgage held by them on the Western Metropolis, which as between the company and himself Luling was bound to satisfy. The remaining $40,000 were retained to work the line.

It was also a part of the original arrangement under ■which the Few York and Bremen Steamship Company was gotten up, that'any creditor of the Forth American Lloyd who desired so to do might acquire an interest in the new company by the purchase of stock at fifty ■cents on the dollar and the transfer of his claim. The ■plaintiff, as such a creditor, elected to avail himself of this provision to the extent of taking $2,700 worth of zaew stock. In order to give him that amount, Taylor, who held the stock subscribed for by him in the form of a certificate issued to him as trustee, surrendered the same, and had new certificates issued in place thereof. One of these, representing plaintiff’s stock, was issued directly to the plaintiff on the 20th of March, 1867, and he paid for it by giving Taylor a check for $379, his note for $1,000, payable six months after date, and a-transfer of his old claim.

On the 23d of March, 1867, a second certificate was. filed, which had been executed by the defendant Taylor as president, and by the defendants Luling, Bellows, and Calkins as a majority of the Trustees of the Mew York and Bremen Steamship Company, and which stated that the whole of the capital stock of said company had been paid in.

On the 31st of March, 1867, the company, in pursuance of the terms of its purchase, gave a mortgage to Charles Luling and Company on the 'three steamships, to secure the sum of $330,126.67, being the balance due to Luling and his correspondents from the Morth American Lloyd, with the 150,000, the amount of their stock subscriptions, deducted.

The Mew York and Bremen Steamship Company did not prosper, and the Pacific Mail Steamship company refusing to furnish any more means to carry on the line, it was on the 27th of February, 1868, resolved to wind up its affairs. All current expenses and debts having been paid, and there being no creditor outside of the parties who had gotten it up, the company ceased to do business. The steamships were sold, and the proceeds applied to the payment of the mortgage held by Luling, and all parties lost what they had put in.

There was no proof that a prospectus had ever been issued, or that subscriptions for the stock had been solicited or authorized by the company to be solicited, or that any stock was sold to outside parties. The whole arrangement seems to have been a scheme by the two heaviest and preferred creditors of an insolvent corporation to reorganize it upon the basis of the property to be saved, and the other creditors had their election to come in upon certain conditions. Bow whether these conditions were fair or otherwise, whether in the organization of the new company the requirements of the law of this State as to the payment of the capital stock in cash were really complied with or evaded by a mere technical performance, whether the directors of the new company observed reasonable care and caution in the management of the affairs of the company, or were guilty of recklessness, extravagance, and excessive liberality in purchasing the three steamers at the price paid therefor and in assuming the payment'.of Luling’s claims against the same, or whether the creditors of such new company, if any existed, could or could not question the validity of the mortgage' subsequently executed to Luling, under which the entire property was finally swept 'away, are questions whicli do not necessarily control the final decision of this case.

They fail, standing alone, to show fraud, while it is upon fraud that plaintiff relies as his cause of action. They are, therefore, mere circumstances to be considered and weighed with the other testimony in the case. But plaintiff’s evidence, when considered even in this entirety, fell quite short o'f establishing that the Bew York and Bremen Steamship Company was organized by the defendants with the intent of deceiving and "cheating the public or any of the creditors of the Borth American Lloyd by palming off upon them worthless shares of its stock. Fraud, in a case like this, cannot be presumed, but must be affirmatively established. The certificate which stated that the capital had been fully paid in was filed after plaintiff had completed the purchase of his stock, and consequently he cannot lave been misled by it.

The only remaining inquiry, therefore, relates to the representations, if any, that were made to the plaintiff' at the time he took the stock. His testimony npon this point shows that in relation to this matter he had no-conversation with the defendants Luling and Bellows, or any one on their behalf, and the complaint was therefore properly dismissed as against them.

As to Calkin and Taylor, plaintiff showed that the-first intimation of the formation of the new company which he received came from Calkin, who informed the-plaintiff that he, the plaintiff, conld come in and convert his old claim into new stock by a payment of fifty cents, on the dollar. The plaintiff inquired what Calkin thought about it, and the latter replied: “It is a good “company; we have formed it; the capital is all paid “in. You go to Ho. 40 Broadway to Isaac Taylor and “ get new stock for your old claims, and you will get “the work of the new company. It is going to be the “biggest company in Hew York.” Plaintiff thereupon did go to the place named and there told Taylor what Calkin had said, and Taylor replied: “That is so. The “ capital stock is all paid in. Everything is all right, “and we will go on swimmingly.” On his cross-examination, plaintiff admitted that he had no doubt that whatever Calkin said to him, he, Calkin, believed to' be true, and that whatever Calkin or Taylor told him, he, the plaintiff, understood to be mere matter of opinion as to the condition and prospects of the company. In this connection it is to be observed that the-defendant Taylor, who had been called as a witness on. behalf of the plaintiff, testified on his cross-examination, that at the time of the organization of the company he believed that the enterprise would prove a success. For such representations no action lies. For before a plaintiff in an action like this can recover, it is essential that he should satisfactorily prove that the representations were fraudulently made, that, is to say, that they were not only false in fact, but that they were made with the intent to deceive. This intent may be inferred from evidence showing that the party making them-knew of their falsity at the time, or at least professed knowledge of their truth when in point, of fact he was conscious that he had none. But in either case, falsehood uttered with intent to deceive is essential. The presumption is in favor of innocence, and on that account the intent or design to deceive the plaintiff must be affirmatively made out by evidence (Wakeman v. Dailey, 51 N. Y. 27; Chester v. Comstock, 40 N. Y. 575, 576 [note]; Marsh v. Falker, Ib. 562; Weed v. Case, 55 Barb. 547). Of course such intent or design can only be proven by facts and circumstances, but one of these must clearly show wilful falsehood. When that is brought home the other facts become tainted by it and may all be construed in the light which the intentional falsehood casts upon them. But without it the presumption of fair dealing will control. The statement that the capital stock had been all paid in was at least technically true, and the other statements involved mere matters of opinion. Plaintiff’s proof was therefore not only deficient upon the question of fraudulent intent, but also upon the question of the falsity of the representations as to existing facts.

Moreover, it fully appeared by Taylor’s testimony, and without contradiction by the plaintiff, that Taylor told and explained to the plaintiff the organization of the company; that plaintiff knew as much about it as Taylor did; that among other things Taylor told plaintiff that the money given by the Pacific Mail Steamship Company had been returned, and that under the circumstances the company did not have a working capital. And finally it appeared that plaintiff was acquainted with the trade and with steamships and their value ; that the three steamers in question were really worth over §500,000 ; that the plaintiff by the purchase of his stock, and as part of the bargain for its purchase, secured the painting of said steamers; that he performed .between $4,000 and $5,000 worth of work on them; that he paid his note of $1,000 with bills for part of such work, and that he received his money for the balance.

Upon the whole case it is therefore impossible to arrive at the conclusion that the plaintiff was induced to purchase the stock by means of and in reliance upon representations which were false and fraudulent within the true and legally established meaning of these words.

The complaint was properly dismissed against all the defendants, and as the other exceptions in the case cannot affect the final result, the judgment appealed, from must be affirmed, with costs.

t Barbour, C. J., and Monell, J., concurred.