Case ID: ad_31/html/0498-01.html
Source: Caselaw Access Project
Author: {"author": "Cullen, J.:", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

John F. Talmadge, Appellant, v. The Sanitary Security Company, Respondent. Darwin R. James, Appellant, v. Same, Respondent. John W. James, Appellant, v. Same, Respondent.
    
      'Gorpomtions — subscriptions to capital stock, induced by false representations, set aside — a corporation taking the fruits of its agent’s acts is liable for such acts.
    
    Where a party is induced to subscribe to the capital stock of a corporation by the representations of an agent authorized to obtain subscriptions, that all but ■$10,000 of the §50,000 of capital stock lias been subscribed, when, in fact, no ¡subscriptions have been received, except possibly those of two parties taking $2,000 of stock each, which appeared not to have been cash subscriptions; and that two gentlemen well known in the community, as experts in the business for which the corporation was organized, had subscribed to the stock, when, in fact, the stock held by these gentlemen had been given to them, and they had not subscribed or paid anything for it; and that the company had in sight or in immediate prospect contracts amounting to $120,000, whereas in fact it had not made a single contract for business, nor were negotiations for business then pending, an action lies in equity to rescind the subscription induced by such representations.
    The fact that no authority was given to the agent authorized to solicit subscriptions to make these statements, does not relieve the corporation from responsibility therefor, the rule being that the receipt and and retention by the principal of the fruit of the fraud of the agent renders the principal liable, although innocent of participation in the wrong.
    
      Appeal by the plaintiffs, John F. Talmadge, Darwin R. James and John W. James, respectively, from three judgments of the Supreme Court in favor of the defendant, entered in the office of the clerk of the county of Kings on the 7th day of October, 1897, in each of the above-entitled actions, upon the decision of the court rendered after a trial at the Kings County Special Term.
    
      James McKern, for the appellants.
    
      J. Berry, for the respondent.
   Cullen, J.:

These actions are brought to rescind the subscriptions of the several plaintiffs to the capital stock of the defendant and to recover the installments paid thereon. In its answers the defendant counterclaims for the unpaid amounts due on the subscriptions. The Special Term dismissed the complaints on the merits and rendered judgments in favor of the defendant for the balance of the subscriptions. From these judgments the plaintiffs appeal. The three cases involve substantially the same state of facts. They were tried together at the Special Term, and the appeals have been argued together before us.

We think it clear that the plaintiffs were imposed upon and induced to subscribe on the faith of representations which, at least, were false in fact, if not fraudulently made. The defendant was organized in July, 1894, with a proposed capital of $100,000. The incorporators were James C. Bayles, the president; Edward A. Sumner, the secretary and attorney, and one Dean. At the first meeting of the directors $10,000 of full-paid stock was issued to Bayles for services rendered and to be rendered to the company, and a like amount to Sumner for similar services. The only service stated definitely in the evidence seems to be the litigation which terminated in the decision of the Court of Appeals, that such a corporation as the defendant was not an insurance company. (People ex rel. Woodward v. Bosendale, 142 N. Y. 126.) In the law reports the name of neither of these persons appears as litigant, attorney or counsel. The object of the company is stated in its certificate of incorporation to be the sanitary inspection and certification of buildings and premises; the sanitary care of premises by which the company should guarantee the sanitary condition of such premises, and the manufacture and sale of sanitary materials and appliances. At a meeting in January, 1895, the company purchased from Mr. Bayles, through an intermediary, Green, a patent for pipe coupling, and in payment therefor issued $30,000 of stock. At the same meeting Bayles was employed as general superintendent at $5,000 a year for the term of five years, and Sumner as attorney and counselor at $3,600 a year for a like period. At or about this time the company sought to obtain cash subscriptions to the remainder of its stock. There can be no doubt that one Wolf was authorized to obtain such subscriptions, and it was through his solicitations that the plaintiffs made their subscriptions. The representations claimed to have been made by Wolf to the various plaintiffs are substantially the same, and differ but in details. The plaintiff Darwin R. James testified that Wolf told him that the cash stock was $50,000, and that all but $10,000 had been subscribed, which $10,000 he wished him,to take ; that two well-known gentlemen, giving their names, had subscribed to the stock; that $30,000 of the stock had been reserved, which was to be divided between the subscribers ratably in proportion to their cash subscriptions, and that the company had business in sight, or in immediate prospect, amounting to $120,000. As a matter of fact, at this time there had been no cash subscriptions to the stock, unless, possibly, those of Bayles and Sumner for $2,000 each. As I read the evidence of Sumner, these were not cash subscriptions, nor are they recited as such in the brief of the counsel for the respondent. The two persons named by Wolf as subscribers to the stock were gentlemen well known in the community, and of exceptionally high standing as health or sanitary experts. In reality, the stock held by these gentlemen was given them by Bayles or Sumner, and they had not subscribed or paid for any stock. The company had not made a single contract for business, nor were, any negotiations for business then pending. The only foundation for the statement as to the business prospects of the company seems to have been the judgment of the officers, that there was a field for such business as the company was to enter upon. Wolf corroborates the testimony of the plaintiffs as to the representations made, except in reference to the two sanitary experts having subscribed to the stock. Wolf says that he stated only that those persons were stockholders and directors. Mr. Bayles testified that lie had never authorized Mr. Wolf to make the representations, and never told Wolf that the facts, the basis of such representations, existed, except as to the business prospects of the company. On this, Wolf and Bayles are in conflict. But we think there can be but little doubt that the representations were made, and that on the faith of the representations the plaintiffs made their subscriptions.

If we assume that no authority was given to Wolf to make the representations complained of to the subscribers, that would not relieve the defendant from responsibility. The rule is that the receipt and retention by the principal of the fruit and product of the fraud of the agent renders the principal liable, though innocent of participation in the wrong. (Bennett v. Judson, 21 N. Y. 238 ; Krumm v. Beach, 96 id. 398; Fairchild v. McMahon, 139 id. 290.)

If we further assume that both Mr. Wolf and Mr. Bayles were innocent of any fraudulent intent to deceive the. subscribers, this assumption would not deprive the plaintiffs of the right to avoid their contracts of subscription. An action in equity, to rescind a contract induced by representations false in fact, is not subject to the same stringent rules applicable to actions at law for damages for deceit. (Hammond v. Pennock, 61 N. Y. 145 ; Kountze v. Kennedy, 147 id. 129.) That the representations of Wolf, if made (and we find that they were made), were false in fact is conceded. If they had been made by Bayles, they would have been fraudulent, for Bayles knew that they were untrue. If Wolf had the knowledge of Bayles, then, too, they would have been fraudulent. Can the defendant retain the fruits of the false representation because instead of negotiating through .one agent it has used two, and only one has made the representation, and only the other had knowledge of the falsity of the representation ? We think not. Whatever maybe the rule in an action at law for damages, a contract obtained under such circumstances equity should not uphold. Writing of stronger cases than this, those of representations wholly innocent, Mr. Bigelow, in his work on Fraud (p. 410), says : If the wrongdoer sue upon a contract thus obtained, the defendant may defend by alleging (1) the misrepresentation and (2), if he received anything of value in the transaction, that he has offered to restore the same to the plaintiff, or he may show the misrepresentation in reduction of the value of the contract, retaining what he has received. In either case the wrongdoer is deprived of any advantage, though not liable to any action for damages. "x" * * Any contract may be rescinded for innocent misrepresentation, which was sufficient inducement thereto.” (See, also, Hammond v. Pennock, supra; Kountze v. Kennedy, supra.)

AVe think that the representations were material. The fact that other persons had subscribed to the stock of the defendant in a large amount, especially that the two experts mentioned had thought well enough of the scheme to invest in it, would naturally influence the determination of the plaintiffs in reference to subscribing to the stock. With the exception of men of extremely cool judgment and great confidence in their own judgment, we all are apt to be influenced in our action and conduct.by the action and conduct of our fellows. Especially is this the case in speculations. It is settled Hav that unless there is artifice, or peculiar attendant circumstances to throw a purchaser off his guard, a false statement of value by a vendor does not give an action for deceit.. (Ellis v. Andrews, 56 N. Y. 83.) But .it is equally settled law that a false statement by the vendor of what he has paid for the property does constitute a fraud for Avhich an action will lie. (Fairchild v. McMahon, supra) Now, of course, what concerns the purchaser is the value of the property. In itself the price paid by the vendor is not of any moment, but it is of vital importance to the purchaser in forming his judgment as to value. The law recognizes this fact and holds a false statement as to price paid actionable. The principle is equally applicable to representations that other persons have purchased similar property or subscribed for stock on the same terms upon which it is sought to induce any person to become a subscriber.

The judgments appealed from should be reversed, anda new trial granted, costs to abide the final award of costs.

All concurred, except Hatch, J., absent.

Judgments reversed and new trial granted in each case, costs to abide the final aAvard of costs.