Case Name: John B. Spotten, Appellant, v. William W. De Freest and Robert E. Stover, Respondents
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1910-11-16
Citations: 140 A.D. 792
Docket Number: 
Parties: John B. Spotten, Appellant, v. William W. De Freest and Robert E. Stover, Respondents.
Judges: 
Reporter: Appellate Division Reports
Volume: 140
Pages: 792–796

Head Matter:
John B. Spotten, Appellant, v. William W. De Freest and Robert E. Stover, Respondents.
Third Department,
November 16, 1910.
Fraud—sale of stock induced by false representations — facts raising • questions for jury—liability of officers of corporation for deceit of agent—measure of damages.
Action to recover damages for alleged deceit whereby the plaintiff was induced . to purchase the stock of a manufacturing corporation. It appeared that the defendants had organized the corporation to take over the business of a partnership previously conducted by them, and had employed an agent to sell stock who issued a circular containing false statements as to the financial condition of the corporation and its prospects. On all the evidence, held, that it was error to1 direct a verdict for the defendants as the proof entitled the plaintiff to go to the jury.
Officers of a corporation who, knowing that a circular advertising stock for sale contains false statements as to the condition of the company, consent that it be submitted to prospective purchasers and reap the benefits of a sale so induced are liable for fraud.
The measure of damages in an action for such fraud is the difference between the actual value of the stock sold and the value it would have had if the stock had been as represented.
Appeal by the plaintiff, John B. Spotten, from a judgment of the Supreme Court in favor of the defendants, entered in the office of the clerk of the county of Saratoga on the 1st day of October, 1909, upon the verdict of a jury rendered by direction of the court, and also from an order entered in said clerk’s office on the 15th day of September, 1909, denying the plaintiff’s motion for a new trial made upon the minutes.
Edgar T. Brackett and Hiram C. Todd, for the appellant.
No appearance for the respondent De Freest.
Rockwood & Scott [Nash Rockwood of counsel], for the respondent Stover.

Opinion:
Cochrane, J.:
Tills is an action to recovér damages for alleged deceit in the sale to plaintiff of capital stock pf the De Freest-Stover Manufacturing Corporation. This corporation was organized in April, 1906, with a capitalization of $50,000, of which $20,000 was preferred stock and $30,000 was common stock. The accomplished object of the corporation was to take over the business and assets of the defendants herein who had been engaged as copartners in manufacturing and selling knit goods and other commodities and to continue such business. The assets of the corporation thus acquired were, of course, subject to the partnership indebtedness which was to be paid out of the profits or revenue of the corporation. Of the corporation thus formed the defendant De Freest was the secretary and defendant Stover was treasurer. Both remained in the actual management and control of the corporate affairs as they had been' in the affairs of the partnership.
Immediately after the corporation was formed and with the knowledge and assent of the defendants it made a contract with an attorney to sell its capital stock and gave to him exclusive control and management of such sale for the period of ten weeks on certain conditions specified in the contract. The attorney thus employed caused to be printed and distributed through the mail circular letters containing, among other things, the following statements, viz.: " I find that in three years' business, starting Avith $800 Avortli of machinery and one employee, besides the partners, they now hold, own and have paid for nearly $21,000 worth of machinery; that the merchandise on hand is now inventoried and amounts to about $7,000, bills and accounts receivable about $2,300 — to say nothing about the great value of the good Avill of the business, and the patents and trade marks and mail order departments Avhich, I believe, are Avorth more than $10,000. A business that will start on $1,000 capital, $800 of which was spent for machines and $200 for materials, that can grow out of its,elf and pay all expenses and accumulate a property all paid for, value about $40,000, in three years is certainly a prosperous one. This is the history in brief as I find it after thorough investigation of the business of the former partnership of De Freest & Stover. I prepared the incorporation papers and By-Laws and Certificates of Stock, both Preferred and Common, of this Corporation and have invested in it myself, thus showing my faith as to its stability, and I can, and do, recommend the purchase of the Preferred Stock as a most excellent investment, and I predict that by January next the surplus earnings will be sufficient to pay as large a rate of dividend upon the Common Stock as is guaranteed in -the Preferred, and this is why Messrs. De Freest & Stover were willing to take for the purchase pricé of all their business and assets $25,000 worth of Common Stock, which they have done."
The printer who printed this circular letter- testified that on the evening of April twentieth both defendants went to the printing office and there waited until the work of printing copies of the - letter -which was then going on could be completed; that they stated that they wanted to take them to the attorney as soon as possible and that 500 copies of the letter were at that time delivered personally to both defendants. The expense of printing was paid by the corporation. Accompanying the letter as it was distributed through .the mail were copies of an affidavit of the defendant De Freest and of a newspaper article which are immaterial to this discussion.
The statements of fact contained in such letter as above set forth were some of them coneededly and essentially false. The business had not grown out of itself and accumulated a property all paid for of about $40,000, but on the contrary the defendant De Freest as a witness testified that the debts of the partnership which were claims against the corporate property exceeded $21,000 of which over $7,000 was represented by a chattel mortgage covering the manufacturing machinery, and there was practically no merchandise or Unmanufactured stock on hand except such as had been pledged-as collateral security for indebtedness.
One of these circular letters was received in due course of mail by the plaintiff who was a druggist. He thereupon opened negotiations with the defendants with whom he had been previously acquainted and had several in ter views, with a .view to purchasing some of the stock. At the first of these interviews according to his testimony he informed both defendants of his receipt of the circular letter which was never at any time repudiated or disclaimed by them. At no time did they undeceive the plaintiff as to the fact of the indebtedness of the corporation. • As the result of his interview and negotiations the plaintiff finally sold his drug business and with the proceeds purchased fifty shares of the preferred stock of the corporation of the par value of $5,000 which was accompanied with fifty shares of the common stock of the par value of" $1,250, paying therefor $5,000. Carrying out an understanding between the parties he was given employment by the corporation and subsequently while thus employed he claims that he discovered the falsity of the representations which had been made to him concerning the indebtedness of the corporation and the value of its assets.
Other facts are relied on in support of the plaintiff's cause of action, but sufficient has been stated to indicate that the plaintiff established his right to have his case decided by a jury. In determining that question he is entitled to the most favorable inferences to be drawn from the evidence. It clearly appears that, the statements made to him in the circular letter were untrue and that they were of such a nature as to necessarily affect the value of the stock. The defendants must have known them to be untrue because the indebtedness chargeable against the corporate assets was primarily their own indebtedness. If the plaintiff relied upon these false statements and was deceived thereby as the jury from'the evidence might have found to be the fact the liability of the defendants follows.
It is urged particularly in behalf of the defendant Stover that he was not responsible for the circular letter. The author thereof was ostensibly in the employ of the corporation. The president of the corporation, however, testified that Stover authorized or assented to such employment. Ho one was more interested than he in the sale of the stock, the proceeds of which were to. be used in capitalizing the corporation formed to take over a business in which he was engaged and to pay debts for which he was liable and in which corporation he became a prominent stockholder and officer. If the testimony of the printer of this circular letter had been believed by the jury they might have found therefrom that Stover had personal knowledge of the contents of that letter, and if he had' such knowledge" he consented that it should be submitted to prospective purchasers and made the instrumentality of selling stock for his profit and advantage. The beneficiary of a fraud cannot consciously permit one to be victimized thereby and escape responsibility for the consequences. (Miller v. Barber, 66 N. Y. 558.) He cannot receive the fruits of a corrupt bargain knowing at the time it was made of all the instrumentalities employed in its consummation and then retain the; benefits thereof without responsibility. He may not under such circumstances shield himself behind the mantle of corporate protection. The law looks beyond the form of a transaction and deals with its substance. We are not deciding that this defendant was guilty of fraudulent methods. Our decision merely is that the evidence was such that lie should have been judged by the jury.
It is further contended that plaintiff has not sustained damages. The measure of damages is the difference between the actual value of the stock sold and what the value thereof would have been if the stock had been as represented. (Krumm v. Beach, 96 N. Y. 398; Hubbell v. Meigs, 50 id. 480 ; Vail v. Reynolds, 118 id. 297.) Plaintiff's purchase included common as well as preferred stock. Had there been no indebtedness the common stock might have been as valuable as the preferred stock. It is not our province to estimate with accuracy or precision the exact amount of damages. That is the province of a jury in accordance with the rule of damages above stated. It is sufficient now to indicate that there was a proper foundation in the evidence upon which the jury could have based a verdict for damages in some amount, and if in any amount it was error to deprive them of the exercise of such function.
The judgment and order must be reversed and a new trial granted, "with costs to the appellant to abide the event.
All concurred.
Judgment and order reversed and new trial granted, with costs to appellant to abide event.