Case ID: ad_122/html/0821-01.html
Source: Caselaw Access Project
Author: {"author": "Laughlin, J.: Ingraham, J. (dissenting):", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Benjamin Stern, Appellant, v. Sara Stern, as Executrix, etc., of Simon H. Stern, Deceased, Respondent.
    First Department,
    December 13, 1907.
    Pleading—sale of stock induced by false representations — complaint stating cause of action—evidence—transactions with decedent — when witness not incompetent.
    There can be no recovery in an action founded upon deceit of the defendant’s testator in selling and delivering his own stock to the plaintiff instead of other-stock in the same company, when there is no proof of damage and the stock ' delivered and accepted by the plaintiff stood in the name of the decedent, for in such case the plaintiff was chargeable with knowledge of the ownership. .
    But a complaint states a cause of action to recover the purchase price of stock when it alleges in substance that the seller was a man of character and pecuniary responsibility, in whom the plaintiff had full confidence; that with a view to induce the purchase, the seller knowingly made false and fraudulent representations which the plaintiff believed, to wit, that the seller had organized the corporation of which he was a director; that it “ was the biggest thing ever gotten up; ” that the stock would double in value, would be a splendid investment, well knowing that it would diminishin value and become worthless; that the corporation was capable of producing a certain amount of iron from which it would pay dividends, whereas it was incapable of producing that quantity and paid but one dividend oiit of the capital, not out of the profits; that the seller was personally familiar with all the facts, for he owned the property individually until the organization of the corporation, to which he transferred it for §3,000,000, when it was actually worth not more than §250,000; and that the plaintiff tendered the stock and demanded the return of the consideration.
    In such action against the representative of the deceased seller, one who had purchased from the plaintiff a portion of the stock purchased by him, which purchase was rescinded by mutual agreement, is not incompetent under section 829 of the Oode of Civil Procedure to testify as to conversations between plaintiff and decedent.
    Ingraham and Scott, JJ., dissented, with opinion.
    Appeal, by the plaintiff, Benjamin Stern, from a judgment of the Supreme Court in favor of the defendant, entered in the office of the clerk of the county of Rew York on the 30th day of January, 1907, upon the dismissal of the complaint by direction of the court at the close of the plaintiff’s case upon a trial at the Re\y York Trial Temí,
    
      
      William JS£. Bennett, for the appellant.
    . Chm'les E. Bushmore, for the,respondent.
   Laughlin, J.:

The action was- brought originally against Simon H. Stern, and upon his death his executrix was substituted.

■ The allegations of the complaint tend to present two theories of liability, (1) for deceit by decedent in selling and. delivering his own stock in the Pennsylvania Furnace Company to plaintiff, instead of stock in the same company which he induced plaintiff to agree to subscribe for and led plaintiff to believe had been subscribed for in his behalf therein, and (2) for the recovery of the purchase price paid for the stock upon the theory that its purchase was induced by-false and fraudulent representations, upon the discovery of which the contract had been rescinded and the return, of the stock tendered, and a return of the purchase price demanded. Upon the first theory no recovery could be had, for no damages were shown, and as the stock delivered and accepted all stood in the name of the decedent, plaintiff wat chargeable with knowledge 'of his ownership. The plaintiff, however, upon the trial, in effect, elected to stand -upon-the second theory, although his counsel made some claims not essential thereto which tended to obscure- the real issue.

It is claimed at the outset that the complaint fails to state a cause of action upon the theory of rescission. I am of opinion that it is sufficient. It is alleged that plaintiff' knew the decedent to be a man of character and pecuniary responsibility, in whom he had full confidence; that on or about the 1st day of May, 1899, plaintiff, at the instance of decedent, subscribed for $100,000 of the capital stock of the Pennsylvania Furnace Cdmpany and paid decedent $50,000 therefor; that with a view to inducing plaintiff to purchase said stock, decedent made false and fraudulent representations to plaintiff, in substance as follows, all of which plaintiff believed and relied upon, and all of which were false, tb the knowledge of decedent, to wit, 'that decedent represented to plaintiff, in May, 1899, that he and others had organized the Pennsylvania Furnace Company, of which he was a director, shareholder and largely interested, to' acquire iron ore rights and,furnace property in Pennsylvania, and to miné, manu- • facture and sell iron ore or pig iron; that “ said company was the biggest thing ever gotten up; ” that stock in the company at $50 per share would double in value and probably be worth three times as much, and would be a splendid investment, well knowing at the time that it would diminish in value and become comparatively worthless ; that the company was capable of and would produce 60,000 tons of ore and pig iron annually, from which it- would pay dividends, whereas the company was incapable of producing, and never produced, tliat quantity of ore annually or paid but one dividend, and that was paid Out of capital and not o.ut of profits. It is further alleged that decedent was personally familiar with all the facts relating to the property concerning which he made the representations, for he owned it individually until the organization of the company on the 18th day of September, 1899, and then on September 22, 1899, by deed, conveyed and transferred it to the company foils,000,000, the property' being actually worth not more than $250,000. It is further alleged that plaintiff duly tendered back the stock and demanded the return of the consideration paid, together with interest thereon. The allegations fully set forth that the purchase of the stock was. fraudulently induced by material false representations. It was conceded that decedent sold and delivered his own stock to plaintiff and recovered and returned the ’ consideration therefor..

One Isaac Stei-n, brother to plaintiff, was' called as a witness in his behalf, and testified that he was present and heard a conversation between plaintiff and decedent, in which he participated, the latter part of April or beginning of May, 1899, in the private office of Stern Brothers, over their dry goods store on West Twenty-third street, Hew York. He was asked to state the conversation. Counsel for decedent asked leave to examine him preliminarily, and developed the fact that lie agreed the day of the conversation to purchase from plaintiff $20,000 of the stock, and subsequently paid him therefor after .receiving it, but that the purchase was rescinded by mutual agreement, and he returned the stock to plaintiff and received his money back, and had no interest in any of the stock or in' the result of the litigation. Counsel for decedent- thereupon objected to the conversation on the ground that the witness was incompetent under section 829 of the • Code of Civil Procedure, upon the theory that plaintiff had derived his title through the witness. The objection was sustained, and counsel for plaintiff duly excepted. The court ruled broadly that the witness was not competent to testify to any conversation between the parties, and, in effect, informed counsel that it was unnecessary to ask specific questions relating to the conversation, limiting it to the stock which plaintiff did not sell to the witness; and counsel for plaintiff again excepted. This evidence was clearly competent. The witness did not purchase any of the stock of decedent. He was as competent to testify to the conversation as if he had never purchased any of it from plaintiff. The fact that he purchased part of it from plaintiff and subsequently rescinded the contract and returned it, left -the case as if he had never purchased it. Plaintiff’s cause of action against decedent -was in no manner derived through the witness. He stands upon the original transaction; Of course, he could only rescind in so far as he held the stock, but he did hold most of it all the time, and presumably, on his allegations, he held it all when he elected to rescind. However, that would only go to the quantum of the recovery, and would not affect the existence of his cause of action on account of the stock which he did not' transfer to the witness.. Plaintiff was thus erroneously deprived of an opportunity to present his evidence of fraudulent representations and develop his case, for, of course, he was incompetent, to give the evidence himself, and a new trial must be awarded.

The judgment should be reversed and a new trial granted, with costs to appellant to abide the event.

Pattebson, P. J., and Claeke, J., cqncurred; Ingeaham and Scott, JJ., dissented.

Ingraham, J. (dissenting):

While the complaint contains allegations of many statements of the defendant’s testator in relation to the future value of the property that was to be acquired by the corporation and of the stock which plaintiff purchased, and enthusiastic and, as it subsequently appeared,, exaggerated estimates of the advantages that "would accrue to the stockholders of the company in consequence of the future operations of the company, there is' but one statement of a fact that was made by the defendant’s testator upon which the plaintiff could base an action for fraud or for a rescission of the contract, and that was the alleged statement to the plaintiff that “ the said company was capable of and will produce sixty thousand (60,000) tons of ore and pig iron annually from which the said company would pay dividends.” Assuming that all of these representations alleged in the complaint were made by the defendant’s testator to induce the plaintiff to purchase the stock, this statement by the defendant’s testator was the only representation of the existence of a fact, upon the falseness of which this action in either aspect could be based. There was no proof offered on the trial that this statement was not true, nor did the plaintiff claim upon the trial that he had evidence to prove it was false. After the testimony of the plaintiff’s brother as to the interview between the plaintiff and the defendant’s testator was excluded, plaintiff went on to prove his case by other testimony, and he offered all the testimony that he desired in relation to the falsity of the statement made. If the testimony of plaintiff’s brother as to the statement of cthe defendant had been admitted, it would only have established the representation made as alleged in the complaint, and in the absence of proof to justify a finding that this statement was false, I think the court could do nothing but dismiss the complaint. All of the other alleged representations related, to what the defendant’s testator expected that the corporation would accomplish. Statements that the company was “ the biggest thing ever gotten up ; ” that the shares of stock “ would double in value' and would probably be worth three times as'much that the stock of the company “was a splendid investment for plaintiff,” were certainly not representations upon which a cause of action for fraud or for a rescission of a purchase of the stock would be based. The further allegation that the plaintiff supposed that he was subscribing for this stock assumed that he had understood that he was obtaining it from the company at fifty cents on the dollar, when in fact the defendant was selling him his own stock, could not justify a verdict for the plaintiff. In the first place, the defendant must have known that there could be no subscription of the company’s stock at less than par. If the plaintiff had subscribed for the issue of stock by the company, that subscription would necessarily be at par and not fifty cents on the dollar, and upon such, subscription, whatever the subscriber paid, he would be liable to the company for the par value of the stock. .But.when the stock was delivered,to the plaintiff by the defendant’s testator it' showed upon its face that it was the defendant’s testator’s stock, and that it stood in liis name .upon the books, of the company, for that fact appeared upon the face of the certificate delivered to the. plaintiff. He, accepted those cfe-rtifk cates as a. compliance with the contract, and it is toó late for him, years afterwards, to attempt to disaffirm ■ the .purchase upon the ground that the stock was the. defendant’s testator’s stock and not the stock of thq company issued .as tile result, of his subscription to the Capital stock of the .company. It is quite evident that by this •'transaction the plaintiff,'who had confidence in the judgment.of the defendant’s testator, entered into a speculation in acquiring this stock, which he thought would result in large profit. This! conclusion quite probably was based upon the enthusiastic and'exaggerated' idea of the defendant’s testator as to the result of the speculation, but I think it is quite clear that there was no- fraud in the transaction to justify this action.

I think, therefore, that the judgment appealed'from should he affirmed. * j

Scott, J., concurred. ' ■

Judgment reversed, new trial ordered, costs to appellant to abide ■event» . ■ •