Case ID: ad_137/html/0166-01.html
Source: Caselaw Access Project
Author: {"author": "Dowling, J.:", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Russell Thayer, Respondent, v. Grant B. Schley and Elverton R. Chapman, Appellants, Impleaded with Henry G. Timmerman and George F. Casilear, Defendants.
    First Department,
    March 11, 1910.
    Fraud — proof necessary to recovery—false representations inducing stockholder to retain stock r— principal and agent—representations made by stenographer of copartnership — failure to show authority or knowledge — evidence — books of corporation—minutes of meeting of directors — erroneous charge.
    In order to recover in an action for deceit whereby the plaintiff was induced to refrain from selling stock, he must establish tliat: false representations were Made by the defendants; that they were calculated and intended to influence him; that they were made to him or brought to his knowledge; that the representations were false to the knowledge of the defendants, and that the plaintiff acted in reliance thereon in good faith and was deceived and damaged'thereby.
    A letter written on the letter paper of a copartnership and signed by a stenographer of the firm in the firm name, purporting to give an opinion as, to the financial condition of a corporation in which two of the partners were directors, is not binding upon the partnership nor upon the individual members thereof, except in so far as they authorized the stenographer to make the statement and advised him of their knowledge or belief.
    There can be no recovery based upon the falsity of such statements when there is no proof that the stenographer had authority to make the statements or that the members of the firm had any knowledge of the letter.
    While a plaintiff, suing members of a firm for deceit, whereby he was induced to- refrain from selling stock of a corporation of which they were directors, having established the representations "made by the defendants, may‘put the. hooks of the corporation in evidence in order to show that the representations weré false, they should be received for that purpose only and not to charge the defendants with knowledge thereof as directors, unless there he further evidence showing that they had knowledge of the entrig?,
    
      In such action it is error to charge in substance that the jury may find the defendant directors liable for deceiving the plaintiff by declaring dividends from the capital instead of from the profits, where the complaint is based solely upon false representations made by the defendants, and allegations as to a conspiracy of'the directors to declare illegal dividends to deceive stockholders are unsupported by any evidence of such conspiracy.
    In such action it is error to admit in evidence the minute books of the directors of the corporation relating to meetings at which the defendant directors were not present, unless there be proof that they had knowledge of the transactions at the meetings.
    Appeal by the defendants, Grant B. Schley and another, from a judgment of the Supreme Court in favor of the plaintiff, entered in the office of the clerk of the county of Hew York on the 17th day of April, 1909, upon the verdict of a jury for $48,550, and also from an order entered in said clerk’s office on the 26th day of April, 1909, denying the said defendants’ motion for a new trial made upon the minutes.
    
      Julius F. WorT&um, for the appellants.
    
      A. Leo Fverett, for the respondent.
   Dowling, J.:

The American Malting Company was incorporated under the laws of the State of Hew Jersey in September, 1897, with a. large capitalization, and the firm of Moore & Schley had been interested in the formation of the company.

The plaintiff, a resident of Philadelphia, in December,-1898, gave an order to Ervin & Co., brokers in that city, to buy for him 700 shares of the preferred stock of the company, which order was executed through the firm of Moore & Schley of Hew York, of which firm Ervin & Co. were the Philadelphia correspondents, at prices ranging from eighty-three dollars and fifty cents to eighty-five dollars per share. The stock was then carried by Ervin & Co. with other stocks on margin. The plaintiff was never personally known to Moore & Schley in the transaction. On July 18,1899, the plaintiff, still being the owner of the stock held by his brokers on margin, became disturbed because its market price was steadily declining,. although it was a seven per cent dividend paying stock, and knowing that the firm of Moore & Schley had been the promoters

of the company and having confidence in them, he told his brokers, Ervin & Co., that he would like to find out from Moore & Schley the real condition of the company, whereupon Ervin & Co. wrote the following letter to the firm of Moore & Schley:

“ Philadelphia, July 18, 1899.
“ Messrs. Moore & Schley,
“ 80 Broadway, Yew York:
“ Dear Sirs.—We have been asked the following question by a stockholder of the American Malting Company, which we are unable to answer. Will you kindly give us as soon as possible the information:
“ Amount of Capital Stock. ^
“ Amount paid on same.
“ What properties does the Company own ?
“ In what condition was the Company at its last Annual Meeting \.. “We will thank you for any general information you can give us on this subject.
“ Yours truly,
“(Signed) ERVIY & COMPAYY”

In.reply Moore & Schley are claimed to have written and sent the following letters: '

“ Moore & Schley “ Bankers
“ 80 Broadway
“ John G. Moore 1 “ Grant B. Schley “ Blverton B. Chapman “ Henry G. Timmerman . “ George F. Casilear
“Yew York, July l§th, 1899.
Dictated.
“ Messrs. Ervin & Company,
“ Philadelphia, Pa.: ■
“ Gentlemen.— Referring to your letter of the 18th instant, we have to say that thé American Malting Company does not issue a statement of its business, but we can say that the capital stock of the Company is as follows:
“ Preferred............................. $14,140,000
“ Common ....................... ... 14,500,000
“ The Company owns some thirty or forty different malting.properties scattered throughout the United States.
“ We understand that the Company’s surplus over its dividend on preferred stock on its year’s business was over $225,000 and that they are doing much better this year.
“ Truly yours,
“MOORE & SCHLEY.
“ be Cauque.” .

This letter was communicated by Ervin & Co. to the plaintiff and plaintiff claims that relying upon the statements contained in this last letter he did not sell his preferred stock, as he had intended, but continued to carry the same until eight months afterwards, when its market price having steadily declined, he instructed his brokers to sell it, which they subsequently did at a price which entailed a loss to the plaintiff of $31,500, which is the difference between the market price at the time he received his knowledge of the Moore & Schley letter and the time when he gave the instructions to sell, for which amount, with interest, he had a Arerdict against the defendants avIio are the surviving members of the firm of Moore & Schley.

The particular representation, upon the falsity of which the plaintiff predicates his right to recovéry, is to be found in the concluding paragraph of the letter, namely: “We understand that the Company’s surplus over its dividend on preferred stock on its year’s business was over $225,000 and that they are doing much better this year.”

This action is brought upon the theory that the sending of the letter of July nineteenth was a firm act for Avhich all of the members of the firm still living were sought to be held liable, although service was had upon only two of the defendants, namely, Schley and Chapman ; the remaining defendants are no longer partners in the firm, although they were such at the time of the writing of the letter. The defendant Schley was a director of the company from ¡November or December, 1898, to October 4, 1899, and the defendant Chapman was treasurer and a member of the executive committee of seven, and also a director in the company from October 2, 1897, to ¡November 9, 1899.

The complaint herein apparently sets forth two causes of action, although it is apparent from the allegation .as to the amount of the damage sustained that the cause of action depends alone upon the misrepresentations claimed to have been contained in the letter, but . in the complaint it is set forth not only that this letter was Sent, that its contents were untrue and that it was sent for the purpose of deceiving and did deceive the plaintiff to his damage, but also what is apparently' a separate cause of action, although not separately stated or numbered, in which .the defendants Schley and Chapman are claimed to have wrongfully caused and. participated in causing the declaration of dividends on tlie preferred stock from the capital .and not from the profits of the malting company, which dividends ■ were declared April. 15, 1898 ; July 15, 1898 ; October 15, 1898 ; January 15,1899 ; April 15, 1899 ; July 15, 1899, all prior to the writing' of the letter in question. The sole connection of the. other defendants with the alleged wrongful acts of the two directors in relation to these dividends is to be found in the allegation that they were made fraudulently and in furtherance of the scheme and conspiracy of defendants and said Moore as partners to deceive the stockholders, and among them the plaintiff, and to sustain the market price of the preferred stock.” The plaintiff further alleges in his complaint that relying not only upon the false and fraudulent statement communicated to him through Ervin & Co., but. also upon the fraudulent and illegal declarations of dividends,', and by reason -of both of these causes, he was induced to retain-his stock, although if he- had known the true condition, he would have sold it immediately. It is enough to say, so far as the suggestion is made in . the complaint of any conspiracy for deceiving, the stockholders, that there is absolutely no proof adduced to support it, nor '.is there any testimony whatever -connecting the defendants Timmerman and Casilear with any of the declaration's of dividends. While these allegations with respect to the declarations of dividends' might have been treated as surplusage and would not have involved .the; cause of action for deceit which still remained alleged, no doubt. their presence in the complaint was directly responsible for some of the confusion which arose as to exactly what issue was before the court for determination. ' . • .

Treating this as an action in deceit against the firm .of Móore & Schley wherein a firm liability is sought to be established, it was incumbent upon the plaintiff to establish the essentials of such an action, which are:

Fvrst. The making of the-false representations by the defendants.

Second. That such representations were calculated and intended to influence the plaintiff and were made to him or brought to his knowledge.

Third. That the representations were false to. the knowledge of the defendants.

Fourth. That the plaintiff acted in reliance upon them in good faith and was deceived and damaged thereby.

This is not a case of firm responsibility sought to be established by law for acts which merely referred to some' detail of firm business, but has to do with a situation which arose when information was apparently sent from a firm as to matters outside the firm business, concerning which two of its members were supposed to have peculiar knowledge, which they had acquired in a representative capacity as directors of another enterprise.

Instead of a letter sent by a mémber of the firm, plaintiff produces one which, upon its face, is signed by a third party whose authority .is not shown, and who, upon tins record, was simply a stenographer in the firm employ. Conceding the genuineness of both letters, there is no rule invoked here under which the reply letter becomes binding on the individual partners of the firm. The cases in which a reply letter has been admitted in evidence have never gone beyond holding that where a letter purporting to be a communication in reply to one received, is written upon business letterheads of a corporation and to it is affixed by stamping a facsimile signature of its secretary and general manager, then the circumstances make & prima facie case in favor of the genuineness of the letter, which justifies its submission to the jury, who are the ultimate triers of its genuineness. (National Accident Society v. Spiro, 78 Fed. Rep. 778; Lancaster v. Ames, 103 Me. 87; 17 L. R. A. [N. S.] 229.) But even conceding the genuineness of tlre signature of de Gaugue, that does not establish the liability of the defendants. What. the letter, which purports to be a firm letter, undertakes to do is to state the individual knowledge or belief of the members of the firm, for, obviously, the firm itself could have no knowledge save that of its members. This being so, it is obvious as-well that de Gaugue was in no position to make representations as to the knowledge or belief of the members of the firm,- except in so far as they or any one of them authorized him to do so and advised him of his or their knowledge or belief. •

Upon no theory could a sténográplier in a firm, employed without either general or special authority shown, be held to have power to bind the firm by representations as to the knowledge or- belief of its- members. In this case de Gaugue was not called as a witness and there is no proof of the extent of his authority and nothing in the record from which authority can even be inferred. It is clear, therefore, that in the absence of such proof the plaintiff cannot recover when the defendants are not shown to have ■ had any knowledge whatever either of the sending or of the existence of the letter.

The books of the American Malting Company were received in evidence, apparently upon the theory that the defendants should have known that the representations claimed to have been made were false, because as directors they had access to the books. While it would have been competent for the plaintiff to have proved the actual condition of the company, after he. had established-the making of the representations by defendants, in order to show that the representations were false, still it was necessary to limit their receipt to that purpose and not admit them in order to charge defendants, who were directors, with knowledge thereof. . It is now well established that the books of a corporation which is not a party to the action cannot be received as evidence of knowledge on the part of the defendants of their condition, without some further evidence connecting them with-the entries or showing knowledge thereof on their part. (Rudd v. Robinson, 126 N. Y. 113; Powell v. Conover, 75 Hun, 11.) As was stated in the former case, there is no principle of law by which a director can be charged with knowledge of the entries in the books of a corporation which is not equally applicable to its stockholders.” That confusion as to the real issue arose and prejudice to the defendants was done by the general admission of these books, appears from the charge by. the learned court below, when among the issues which he suggested to the jury as being present in the case were these: Were the books of the company fraudulently made up ? Were dividends fraudulently declared ? Was the plaintiff deceived % ” Furthermore, it was error to charge the jury with respect to the liability to stockholders of the directors of the corporation who declared and paid dividends out of the capital and not from the profits, as well as to charge them with respect to the relation of trust and confidence which directors of a corporation occupy towards the company and the stockholders. These matters apparently owed their presence in the case to the unnecessary allegations of the complaint, but they had absolutely nothing to do with the one cause of action for deceit upon which plaintiff’s recovery is sought to be based.

It was also error to admit in evidence the minute books of the directors of the malting company as to meetings at which neither of the defendant directors was present, without any proof of knowledge on their part as to what transpired at these meetings. There are other errors assigned which need not be discussed, as those already set forth require that the judgment and order appealed from should be reversed and a n.ew trial ordered, with costs to appellants to abide the event.

Ingraham, P. J., McLaughlin, Laughlin and Miller, JJ., concurred.

Judgment and order reversed and new trial ordered, with costs to appellants to abide event.