Court Opinion

ID: 5220027
Source: CourtListenerOpinion
Date Created: 2022-01-06 16:31:46.32595+00
Date Added: 2024-06-11T08:27:30.107819
License: Public Domain

Miller, J. (dissenting):
The appellant challenges the sufficiency of the complaint. The action is for fraud and deceit in inducing the plaintiffs to purchase shares of the capital stock of the American Ice Company. The defendants were directors of said company. It is alleged that the directors declared a dividend on the common stock and caused it- to be paid out of capital, there being no surplus or earnings, in violation of the statute of New Jersey, in which State said company was incorporated, and that they caused the fact of the declaration of said dividend to be published in the newspapers and disseminated among the public; that well knowing the falsity thereof and intending thereby to deceive the public and tq induce them to purchase the shares of stock of said company, each, of said defendants intended said declaration of dividend to be regarded as a representation that it had been earned and was declared from surplus and net profits; that' in reliance thereon, and in the b'elief that said representation was true, the plaintiffs, purchased 600 shares of the said stock and were thereby damaged in a sum stated.
The plaintiffs pleaded the New Jersey statute but the action is not brought thereon. It may be assumed that the remedy given by the statute is exclusive, but an action for fraud and deceit can hardly be said to be statutory. -The fact that it was. *533•unlawful to declare dividends except from, surplus or the net profits arising from the conduct of the business is an element to be considered in determining the quality of the defendants’ act as a representation, and the reliance which the public might naturally be expected to place upon it as such.
It is familiar law that a fraudulent representation may be effected by conduct, by acts as well as by words, by silence when there is a duty to speak, by half-truths calculated to mislead, or by reckless statements made without knowledge. (Vide Nickley v. Thomas, 22 Barb. 652; Viele v, Goss, 49 id. 96; March v. First Nat. Bank, 4 Hun, 466; affd., 64 N. Y. 645; Second Nat. Bank v. Curtiss, 2 App. Div. 508; affd., 153 N. Y. 681; Devoe v. Brandt, 53 id. 462; Beardsley v. Duntley, 69 id. 577; Grant v. Walsh, 145 id. 502; Kountze v. Kennedy, 147 id. 124.) It is equally well settled that the representation neéd not be made directly to the party injured by it (Brackett v. Griswold, 112 N. Y. 454), and that, one who is induced to enter into a contract by the false representations of a third party may have a right of action against the latter for the wrong. (Kujek v. Goldman, 150 N. Y. 176.) The principle of the decisions is that a. party is answerable for what he intends to accomplish; that one who intentionally deceives another to his injury, no matter how, is accountable for the wrong; that a party is hable for misrepresentations, either by conduct or by words, made for another to act upon, if they were calculated to deceive and if in fact they do deceive such other person into acting in reliance upon them to his injury.' It is quité as easy to deceive by acts as by words and the deed is often more effectual than the word. But the law is not so blind or so absurd as to judge an act by the means regardless of the motive.
Tested by the application of those principles the complaint in the case at bar alleges all the essentials of an action for fraud and deceit, i. e., a representation by acts for the public, and, therefore, for the plaintiffs, to act upon, falsity, scienter, deception and injury. A declaration of a dividend by a going concern implies earnings from which to pay it, and the publication of the fact of such declaration is certainly calculated to induce the public to believe that the dividend has *534been, earned and that the corporation is prosperous. If, intending the public to act thereon, the defendants had made and published a report expressly stating that the dividend declared had been earned, there would be no doubt of their
' liability to a person thereby deceived to his injury. ■ The familiar cases of false prospectuses need not be cited. Why distinguish between a false affirmation and an act calculated to have the like effect, the motive and the result in each case being the same? Certainly the law makes no such distinction. We have had many illustrations in cases before us of the devices to deceive the public employed by managing directors, who misuse their positions to promote stock speculation, and the payment of dividends out of capital is a familiar one. When that is d.one to induce the public to purchase shares of the company and thereby to create a fictitious value, upon which the wrongdoers may trade, they should be held accountable precisely as though the like deception had been practiced by actual misstatements.
■ , The novelty of the action need not deter us from applying settled principles of law, but the case is not entirely without precedent. (Keeler v. Seaman, 47 Misc. Rep. 292; Stainbach v. Fernley, 8 L. J. Ch. 142; 3 Jur. 262.) The latter case was decided in 1839. It should be said that those cases involved misstatements, but it was considered in each that the very act of declaring a dividend was a representation to the public that it had been earned. Perhaps Bedford v. Bagshaw (29 L. J. [N. S.] Com. Law, 59) is more nearly analogous to this case. In that case directors procured the shares of their company to be inserted in the official list of the Stock Exchange by a misrepresentation' that two-thirds of the scrip had been paid upon; and it was held that the directors were liable to third persons who were induced to purchase shares in reliance upon the fact that they were listed.
It is not expressly alleged, though it may fairly, be inferred from the facts stated, that the appellant was present at the meeting of directors when the dividend was declared. Moreover, his actual participation in the fraudulent scheme to deceive the public is alleged.
Of course, there was no representation to the plaintiffs as to *535the condition of the company, unless the dividend was declared •and the fact of its declaration published for the purpose of inducing the public to purchase the shares of the company in the belief that the dividend had been earned. The act itself, though in violation of the statute, would not give third parties a cause of action for fraud and deceit, unless done for them to act upon. To establish that the act was a representation to the plaintiffs, they will have to prove the act and the fraudulent purpose as independent elements. It would be premature now to decide what proof would suffice to establish the latter element. It is sufficient for the present appeal that the complaint contains the necessary averments.
As a partial defense, the appellant alleged that a plan was devised by certain of the stockholders of the American Ice Company to reduce the losses incurred by the holders of stock through the decline in its market price, which was the organization of a holding company and the exchange of its stock for the common stock of the American Ice Company in the ratio of one to five; that the plaintiffs could have effected such an exchange and sold the stock received in exchange for a sum stated, and thereby could have reduced their loss. Of course, the stockholders did not have to take stock in a new company, and the matter pleaded is not a defense, partial or otherwise, to the plaintiffs’ cause of action. It may have a legitimate bearing on the value of the stock which they were induced to purchase. If so, it can be proved, without being pleaded, as a fact relevant to the. question of damages.
The interlocutory "judgment should be. affirmed, with costs.
Dowling, J., concurred.
Judgment reversed, with costs, and demurrer overruled, with ■ costs, with leave to plaintiffs to withdraw and to amend complaint upon payment of costs in this court and in the court below.