150 N.Y.S. 758 | N.Y. App. Div. | 1914
The facts admitted by the demurrer herein may be summarized as follows: The individual defendants compose the respective firms of Kidder, Peabody & Co., and F. S. Moseley & Co. Prior to October, 1912, said firms, together with the defendant corporation, Assets Eealization Company, were joint owners of certain 'shares of stock in the United States Worsted Company (a corporation organized under the laws of the Commonwealth of Massachusetts hereinafter referred to as the company), including first preferred stock, second preferred stock and common stock, in excess, in each of said classes, of the amounts subsequently purchased by the plaintiff. In the months of October and November, 1912, the defendants, by Ladenburg, Thalman & Co., their agents, duly authorized in that behalf, represented to the plaintiff that the company was then earning at the rate of seven per cent on its first and second preferred stock, and, in addition thereto, over two per cent on the common stock, and that the company throughout past years had earned an average in excess of $800,000 per
“ Statement of Income Available for Dividend Distribution.
Based on Estimated results of upon Consolipast years dation $800,000 $1,000,000 “Seven per cent dividend on First Pre- . ferred stock..................... 350,000 350,000 $450,000 $650,000 “Seven per cent dividend on Second Preferred stock.................. 280,000 280,000 $170,000 $370,000 “Equals on Common stock...........
It was further represented to the plaintiff that the company was commencing operations with a working cash capital of $2,500,000; that between July 1, 1912, and November 1, 1912, it had earned a surplus at the rate of $800,000 per annum, all of which was available for dividend distribution; and that the value of its plant, merchandise and other quick assets was $9,000,000. The defendants during said months further represented to plaintiff that the assets and liabilities of the company were equal in amount to the figures appearing in a certain statement, which was then furnished to the plaintiff and of which the following is a copy:.
“Assets: ,
“ Plants, Water Power and Good Will...... $12,260,797 74
“Bills and AccountsEeceivable............ 1,281,167 75
“ Inventories of Merchandise, etc............ 3,441,976 13
“Investments............................. 153,132 07
$17,137,073 69
“Capital —1st Pfd.......... $5,000,000 00
2nd Pfd.......... 4,000,000 00
Common......... 7,000,000 00
- $16,000,000 00
“Payables.................. $3,611,262 82
“Less Cash................. 2,474,189 13
- 1,137,073 69
$17,137,073 69”
The plaintiff, which is a foreign corporation organized under the laws of the United Kingdom of Great Britain and Ireland, in reliance upon said representations, agreed with the defendants to accept and pay for, and in or about the month of November, 1912, did accept and pay for 425 shares of the first preferred stock, 150 shares of the second preferred stock and 250 shares of the common stock of said company, for which plaintiff paid to the defendants the sum of $52,500. Plaintiff further alleged: “ Ninth. Said representations were false in that, in truth and in fact, the United States Worsted Company was making no current earnings whatever at the time said representations were made; in that, based upon the results of the operations of past years, there would not be available for dividends on the company’s stocks a sum equal or nearly equal to $800,000, or any sum whatever; in that the plants, merchandise and other quick assets of the United States Worsted Company were not of the value of $9,000,000, and did not exceed the sum of $8,107,000; in that the United States Worsted Company between July 1, 1912, and November 1, 1912, had earned no surplus available for dividend distribution and had earned no surplus whatever, but that it had, on the contrary, lost heavily in its operations; in that the company was not commencing- and did not commence operations with a working cash capital of $2,500,000, in that the $2,474,189.13 represented as cash was not working cash capital and it was commencing and did commence operations without any working cash capital whatever. Said representations were also false in that the bills and accounts receivable of said company and the inventories
As we deem the alleged agreement that a market would be created for the first and second preferred stock to have been an independent agreement, and there is no allegation that a condition of the sale was that if the defendants did not create a market title to the stocks should be reassumed by them and the purchase price repaid, we think that so far as that branch of the case is concerned in the present state of the pleadings, the plaintiff could not do more than sue for damages, if any, which it might have sustained by reason of the failure to carry out such independent agreement, and such breach did not warrant rescission. (Muller v. Eno, 14 N. Y. 591.) But the important question presented by the appeal is whether the facts stated warranted a rescission of the contract upon the ground of defendants’ misrepresentations. While the demurrer admits that the representations made were not in fact true, it will be noticed that there is no allegation of scienter upon the part of defendants, such as would be required to sustain an action brought at law to recover damages for fraud. Concededly, the complaint would be insufficient to sustain such an action because of the failure to allege knowledge upon the part of the defendants of the falsity of the representations made by them. But this is an action brought in equity for the rescission of the contract between the parties upon the theory of an innocent misrepresentation made by the sellers which induced the buyer to purchase property in reliance upon the misrepresentations, in the absence of which it would not have bought. The essentials to justify a rescission of a contract under such conditions, as gathered from the authorities, appear to be: First, the misrepresentation of a material and substantial fact in relation to the property sold; second, a reliance upon such misrepresentation by the purchaser, who is induced thereby to make the purchase; third, an offer to return the
The misrepresentation which is admitted to have been made herein cannot be regarded otherwise than as a material one. The jurisdiction of equity is not exercised merely because the purchaser did not receive the specific property or thing which was the subject of the bargaining of the parties. The cases where such relief has been granted, even where the contract has been fully executed, are cases where, while there has been technical performance with the terms of the contract, so that the buyer receives something which answers the description of the thing, yet there has been some defect or depreciation or change or infirmity in it which rendered it not the thing that both parties thought was passing in the transaction. So here the papers which passed represented certificates of stock in a corporation, but not in a corporation in the condition which both parties believed it to be in; nor did the shares represent an interest in such a corporation as both parties believed was the basis of the transaction. What the plaintiff was offered and requested to buy by the defendants, and what it thought it was purchasing from them when it paid the price which they demanded, was stock in a going, successful corporation which had been earning a sum in the past years based on which there would be an amount available for dividend distribution of at least $800,000, and which, for the six months between July
All of these beliefs of the plaintiff were warranted by the representations made to it by the defendants as to the integrity, security and desirability of the securities bought by the plaintiff, and were of vital importance, not only in arriving at their value, but in determining their desirability as an investment and their safety as well.
Under these conditions, we believe that the requirements for the maintenance of such an action in equity have been fully met. There is a-misrepresentation of material facts in relation to the property sold, relied upon by the plaintiff, without which misrepresentation it would not have made the purchase in question; followed by a tender of the property bought, and a demand for its purchase price, as soon as the misrepresentation was discovered, and before there was any material change in .the relations of the parties or of the corporation whose stock was the subject of the sale. The other phase of the complaint, with respect to the agreement of the defendants to create a market for this stock, we have already stated to be deemed by us a separate and independent agreement upon the part of defendants, which would not justify the rescission of the contract.
The judgment appealed from will, therefore, be affirmed,
Ingraham, P. J., Laughlin, Scott and Hotchkiss, JJ., concurred.
Judgment affirmed, with costs, with leave to defendants to withdraw demurrer and to answer on payment of costs.
Evans v. Bicknell.— [Rep.
Equity Juris. 1st Am. ed.— [Rep.