120 N.Y.S. 237 | N.Y. Sup. Ct. | 1909
This is an action for damages for alleged false representations contained in a prospectus offering for sale the bonds and - stock of the United States Independent Telephone Company, whereby plaintiff was induced to invest $4,000 in such securities, which turned out to be almost worthless. The jury were instructed that, if they found that no one of the defendants wás guilty of any fraud in connection with the preparation or publication of the prospectus, then a verdict in favor of all the defendants must he rendered; but, if they found that some of the defendants were guilty of fraud in connection therewith, those defendants so guilty were liable to the plaintiff, if he was deceived thereby; and that the liability of the other defendants who were not guilty of any fraudulent purpose
The jury evidently agreed that none of the five defendants in whose favor the verdict was rendered was guilty of any personal wrongdoing. In that finding I heartily concur. The jury left undetermined the question whether the remaining four defendants were guilty of fraud; and the verdict exonerating the five defendants, Sibley, Watson, Holden, Eastman and Strong, can only be explained upon the theory that the jury found that, whether the prospectus was false or not, and irrespective of the guilt of any of the other defendants of such fraud, there was no relation of agency existing between these five defendants and the others, or any of them, in the transaction in the course of which the prospectus was issued. This court is now asked, upon the whole evidence, to set aside the verdict as to the five defendants on the ground that the verdict is contrary to and against the weight of evidence; and a new trial is also asked because certain rulings made by the court during the trial, to which the plaintiff duly excepted, are claimed by the plaintiff to be erroneous.
The questions of law raised by the exceptions will first be discussed. Upon the trial, the court took from the jury as a ground of action the representation made in the prospectus that the Hew York Independent Telephone Company, the majority of the stock of which was owned by the United States Independent Telephone Company and was placed under the mortgage given to secure the bonds that were advertised for sale, owned a franchise in the city of Hew York, acquired under the advice of eminent counsel,
The prospectus contained an unqualified assertion of the ownership by the Hew York Independent Telephone Company of a franchise (without naming the municipal department granting the same), which undoubtedly was intended to be understood as meaning a franchise granted by the municipal body possessing requisite jurisdiction, and sufficient to permit the construction and operation of a general telephone system in the city of Hew York; and, because ownership of such a franchise was so unqualifiedly asserted, it is now claimed (as it was upon the trial) that the defendants responsible for the issuing of the prospectus are chargeable with fraud for asserting knowledge of a fact which they did not know to be a fact. But it appeared clear that the defendants had proceeded with great care in the investigation of the validity of the franchise, had been advised as to its validity by counsel upon whom they had every right to rely, and that, although they were mistaken, bad faith in that assertion of ownership could not be reasonably inferred from the circumstances surrounding the parties at the time. And it was held that the remedy for the misrepresentation of the fact of ownership was not to be found in an action for fraud (Bell v. James, 128 App. Div. 241), but in a rescission of the subscription contract, the return to the vendors of the bonds and stock purchased, and an action to recover the money from the parties to whom it was paid, on the ground that the parties had been mistaken as to the consideration supposed by them to underlie the subscription contract, the existence of an intent to deceive not being requisite to the maintenance of such an action. This ruling seems to me to be proper. Tryon v. Lyon, 133 App. Div. 798; Redell v. Wilder, 65 Vt. 406.
The second ground of frau'd which the court declined to submit to the jury concerned the alleged over-capitalization of the United States Independent Telephone Cc&ipany, based upon its issue of bonds to the amount of $1,278,000, and capital stock to the amount of $38,597,500 in exchange
The reasons why the question of excessive valuation was not submitted to the jury were: First. Assuming that a valid franchise existed, as the parties to the transaction then believed, unrestricted as 'to time and unhampered by adverse conditions as to paying a portion of the receipts to the city, its value would undoubtedly be very large, and could in good faith be estimated in the millions; nor could its value be accurately determined according to any well recognized standard. Second. The plaintiff, when he subscribed for the bonds and stock, knew, as he testified, that the franchise was substantially all that there was behind the New York end of the investment and, although he supposed a franchise had been secured, he knew that only the future could determine the success of the venture of installing and operating an independent telephone system in the city of New York. He took the stock as a bonus, in addition to the bonds, for which he paid par; and, being an experienced and intelligent business man, could not have well believed that the stock represented either cash paid by somebody else, 100 cents upon
At the opening of the trial, each defendant or group of defendants, represented by separate attorneys of record, demanded the right of separate peremptory ehallengés; and the court stated that, if a divergence of interest was likely to develop and differences arise between the defendants themselves, to be decided by the jury, duplicate challenges would be allowed. From the preliminary examination of the defendants, which was had before me on an order allowing such examination on motion of the plaintiff, the testimony was such that, when the trial opened, it appeared to me reasonable to expect that such divergence of interest might arise.
It was announced when the trial opened that Mr. Milburn would come into the trial later as counsel for some of the parties; and the court stated in this connection that, if the defendants were so situated that Mr. Milburn could act for them all, only one set of peremptory challenges should be allowed; and it was then stated by counsel that it had not yet been fully determined for whom Mr. Milburn was to act when he came into the case. Accordingly, as there were five defendants or groups of defendants, appearing by separate attorneys, a full set of peremptory challenges was allowed each defendant or group of defendants thus appearing; and, of the thirty challenges thus allowed, twenty-six were actually used. To this allowance the plaintiff duly excepted, and he now asks that the verdict be set aside because of such ruling.
Under section 1176 of the Code of Civil Procedure, “ each party ” is allowed six peremptory challenges. There is no reported case in Hew York where the word “party” in this section of the Code has been construed. Different con- - structions have been put upon similar words in the statutes of other States, and the practice is not uniform, but it is evident that the words “ each party ” do not mean each indi
The reason for allowing peremptory challenges cannot always be satisfied by restricting the defendants collectively to one" set. If, for instance, an action is brought to determine the validity of the probate of a will, and some of the defendants will be benefited by breaking the will and some by sustaining it, if a defendant desirous of breaking the will should challenge peremptorily the first six jurors called, the
In this ease the liability of any one defendant to the plaintiff in case the prospectus were found to be fraudulent might be predicated upon either one of two grounds, according to the proof applicable to him, namely, his personal participation in the wrongful act, or a liability founded, not upon any wrongful act or purpose of that defendant, but upon the fact, if it were proven, that some other defendant, acting as agent for him in the business of offering the bonds and stock of the United States Independent Telephone Company for sale, had committed a fraud upon the plaintiff; and the court, if it had been requested so to do by any of the defendants, would have submitted to the jury, under section 1187 of the Code of Civil Procedure, a question to be answered by a special finding (in case the prospectus was found to be fraudulent and a general verdict rendered against all the defendants) naming the defendant or defendants found guilty of personal participation in the wrongful act, and naming the defendants held liable, not for a personal wrong of their own, but because a wrong had been committed by one or more of their associates in the syndicate to whom they had committed the management of the enterprise. Such a special finding would have been proper in the case in order that the rights of the defendants innocent of participation in the wrong might be thus safeguarded, and so that they, without further litigation, might be subrogated to the rights of the plaintiff, in case they desired to take up the judgment and enforce it against their codefendants, and thus in turn obtain for themselves indemnity from the actual wrongdoers for the loss brought upon them in the first instance by reason of their joint liability with the wrongdoers to the parties defrauded by the prospectus. While there is no right of contribution among intentional wrongdoers, yet where one is held liable to a third person by reason of the wrongful act of his agent, the principal, himself innocent, has a right to indemnity from his agent, who has thus misused his authority. Mr. Keener in his work on Quasi Contracts, page 409, says:
After the jury was selected, Mr. Milburn, who was not present during the empanelling of the jury, took part in the proceedings as counsel for the defendants Sibley, Watson and Holden; but the greater part of the actual work of the trial was performed by him, and he opened the case to the jury on behalf of all the defendants, and he alone summed up the case for all the defendants. So, whatever may have been the expectation of the parties at the beginning of the trial as to a divergence of interest or possible antagonistic rights which would have to be passed upon by the jury, at the end the defendants seemed to consider that their interests were amply conserved by having one counsel speak for them all; and, in the light of that determination by the defendants themselves, it is now clear that, if the court had only allowed the defendants collectively one set of peremptory challenges, the defendants would have had no just cause of complaint.
The uncertainty in cases of this description should be obviated by an amendment of the Code of Oivil Procedure settling definitely the practice to be pursued. But I am satisfied that if too many challenges were allowed the defendants in this case, nevertheless, the jurors sworn in after the defendants in the aggregate had used six peremptory challenges were fair-minded and duly qualified jurors; and it not appearing that plaintiff accepted any juror as to whom he would have exercised a peremptory challenge had
There remains to be considered the question whether the verdict exonerating the five defendants is contrary to and against the weight of evidence. I shall not review the evidence as to the existence of fraud in the prospectus, but shall discuss only the evidence bearing on the responsibility of the managers of the syndicate for the wording and issuance of the prospectus, and the responsibility of the five defendants who have been exonerated by the jury for the acts of the managers of the syndicate in this respect.
First, then, who were the managers of the syndicate, and what operations did they, as such, undertake to carry out? Hr. Satterlee testified that, at a meeting of the original syndicate about February 1, 1905, the defendant Finucane was chosen chairman, Charles E. Angle secretary, the defendant Satterlee treasurer, and an executive committee was chosen consisting of the defendants Finucane and Satterlee and John C. Woodbury. See trial testimony, pp. 1118, 1119, and deposition, pp. 15, 16, where he refers to them as managers. At that time the syndicate raised $250,000 to acquire a franchise for an independent telephone system in the city of Yew York. The first syndicate consisted of the defendants Finucane, Satterlee, Watson and Sibley, and other gentlemen not defendants in this action, viz., Messrs. Woodbury, Angle, Duffy, and Frederick Cook, now' deceased. Defendant Page of Yew York was the principal lawyer employed by the syndicate from first to last. He was present at the organization of the syndicate, drew most of the papers, and was the adviser of its managers throughout; and, either at first or when the syndicate was later enlarged, became a member of the syndicate, contributing to its funds. These gentlemen (with the exception of Page) were interested in the Stromberg-Carlson Manufacturing Company, located at Rochester, which manufactured telephone apparatus, cables, switchboards, etc., and did an ex
On the 13th and 14th of September, 1905, contracts were made as follows: Finucane (on behalf of the syndicate) agreed with the Hew York Independent Telephone Company to transfer the rights acquired by him in the Hew York franchise to the Hew York Independent Telephone Company for $41,000,000 of its capital stock, three certificates for which stock he directed to be issued as follows: First, $26,000,000 to the United States Independent Telephone Company; second, $13,000,000 additional to the United States Independent ■ Telephone Company; and third, $2,000,000 to Albert O. Fenn. He also agreed with the
It was shown upon the trial beyond question that, although the syndicate may not have anticipated, at its inception in January, 1905, the formation of a holding company, nevertheless, as the situation developed, the formation of that holding company was the logical method to be adopted for bringing into a unity of interest and policy the Hew York Telephone enterprise and the Stromberg Company and such independent companies as might be desired; and the managers of the syndicate naturally became the controlling factors in the organization of the United States Independent Telephone Company. They devised its plan of operations, selected its preliminary board of trustees, paid its incorporation tax out of the syndicate treasury, controlled the making of its preliminary contracts; and Mr. Page, in the service of the syndicate, drew the legal papers necessary for the launching of the company.
But it was contended on behalf of the defendants (trial minutes, pages 2105—2109) that, while the syndicate managers did undertake to bring the Hew York Independent Telephone Company stock and the Stromberg stock under the control of the United States Independent Telephone Company, nevertheless the function and operation of the syndicate stopped with the incorporation of the United States Independent Telephone Company and the making of the contracts for the transfer to it of the stock of the Hew York Independent Telephone Company, which the syndicate had acquired, and of the Stromberg stock, options on which had been gathered together as the result of the activities of Mr. Penn; and that all that remained for the syndicate to do at the date of the prospectus was to divide among its members their profits in the enterprise up to that point; and that the issuing of the prospectus and the marketing of the bonds were the work of the United States Independent Telephone Company and its agents only; and that, accordingly, if there were any false
If the relation of the syndicate to this matter as a controlling element had ceased before the prospectus was devised, then the verdict exonerating the five defendants, Sibley, Holden, Watson, Eastman and Strong, from liability was well rendered. If this theory is not supported by the evidence, but, on the contrary, if the syndicate managers, acting as such, not only formed the holding company, but controlled and directed the marketing of its securities to accomplish a purpose of the syndicate then unrealized, the issuing of this prospectus being adopted by the managers as a means to that end, it follows that, for whatever fraud was committed in the issuing of that prospectus, not only are those defendants liable who personally participated in the wrongful act, but those defendants also are liable who, innocent indeed of any personal wrongdoing, nevertheless appointed or recognized as managers of the syndicate to which they belonged those who committed the wrong. Fifth Avenue Bank v. Forty-second Street Railway Co., 137 N. Y. 241.
How, what was the real situation on October ninth, when this prospectus was issued? Had the conceded object of the syndicate then been attained, viz., the uniting under one control of the Stromberg Company and the Hew York Independent Telephone Company? The majority stock of the latter had been secured, but the situation with regard to Stromberg was this: The defendant Fenn had received from Stromberg stockholders options upon a majority of the Stromberg stock. The options which Fenn had secured were of three kinds: First, options to turn over to Fenn Stromberg stock for the bonds and stock of the Hnited States Independent Telephone Company. Second, options to turn over to Fenn Stromberg stock for part cash and part securities. Third, options to turn over to Fenn Stromberg stock for cash only. The mixed options (for cash and securities both) Avere not divisible, that is to say, if a Strom
The prospectus does not state that it is issued by the Hnited. States Independent Telephone Company, nor does it state that the company is offering its bonds and stock for sale. Prior to its date there is nothing in the minutes of the directors of the United States Independent Telephone Company authorizing the issuing of the prospectus or the appointment of Fenn as sales agent for the company, or providing for the offer of its bonds or stock for sale to the public generally. The subscription contracts (Forms A. and B.) on their face were between the subscribers and Fenn. And in the whole transaction, as reflected in the books of the United States Independent Telephone Company and the
The sales of bonds at Rochester brought in cash amounting to $1,095,000, which was deposited under said account in the Alliance hank. The sales at St. Louis amounted to $1,565,000; the entire sales realizing* $2,660,000 in cash. It seems that in November, 1905, the United States Independent Telephone Company desired to purchase an interest in a telephone company at Indianapolis, and wished to use $250,000 for that purpose, and to effect the purchase through Mr. Breckenridge Jones of St. Louis, who was a director of the United States Independent Telephone Company. It would seem that the proceeds of the sales of the bonds in St. Louis were then on deposit with the Mississippi Valley Trust Company, and a letter was written to Fenn by Finucane, as president of the United States Independent Telephone Company, of which the following is a copy:
“November 25, 1905.
“Albert O. Fenn, Esq.,
“ Rochester, N. Y.:
“Dear Sir:—The United States Independent Telephone Company desires to purchase an interest in the new long distance telephone company of Indianapolis. Accordingly we request you to permit the Mississippi Valley Trust Company to advance to this company the sum of $250,221 for this purpose. This amount to be repaid you by the United States Independent Telephone Company on demand. If you are willing to advance the above amount, will you please'instruct the Mississippi Valley Trust Company to pay said sum to Mr. Breckenridge Jones for account of this company.
“ Tours very truly,
“ United States Independent Telephone Company,
“ by Thomas W. Finucane, President.”
And pursuant to the request contained in that letter, Mr. Fenn authorized Mr. Jones to take $250,000 to make that
The treatment of this $250,000 by the company as a loan to it from Fenn is not singular, for in no instance did the company assume control, in its own right, of any part of the $2,660,000 received by Fenn as the fruits of the prospectus.
Further proof of the fact that Fenn (representing the syndicate) stood as the middleman, between the Stromberg stockholders and the cash subscribers for United States Independent Telephone Company bonds on the one hand and the United States Independent Telephone Company on the other, is found in the resolutions of the executive committee of the board of directors of the United States Independent Telephone Company, concerning the issuance of bonds and stock for all the Stromberg stock which the company acquired and placed under its mortgage. The mortgage expressly states that it covers 11,591 shares preferred and 41,035 shares of common stock of the Stromberg Company. These shares include not only those acquired through Fenn by the exchange of bonds and stock, but also all those purchased by him for cash up to the time the mortgage was executed. These cash purchases amounted to about two millions of dollars. By a resolution of the executive committee passed ¡November twenty-ninth, the officers of the United States Independent Telephone Company were directed to execute and issue to Albert O. Fenn a certificate
How, in the contract between Fenn and the United States Independent Telephone Company of September thirteenth and fourteenth, under which Fenn agreed to deliver Stromberg stock to the company, and the company to give Fenn in exchange therefor its securities, it Avas provided that for each share of Stromberg preferred Fenn was to receive bonds and stock to the amount of $175; viz., bonds for $125 and stock for $50; and for each share of Stromberg common Fenn was to receive bonds and stock to the amount of $245; viz., bonds for $175 and stock for $70. At this rate, for the entire Stromberg stock placed under the mortgage, Fenn would be entitled to receive bonds to the amount of $8,630,000, Avhich was the exact bond issue provided for in the resolution of November tAventy-ninth, and he would be entitled to receive stock to the amount of 34,519% shares, which is just one-half a share less than the amount actually issued to him under that resolution. ¡Now, in dealing with the Stromberg stockholders, Fenn gave to those stockholders who turned their stock in for the United States Independent Telephone Company securities, the exact amount of bonds and stock which he received from the United States Independent Telephone Company for those shares; but in dealing with the Stromberg stockholders who turned their stock in for cash amounting to about $2,000,000, Fenn paid them only $125 for each share of preferred and $175 for each share of common, and did not give them any stock of the United States Independent Telephone Company. When Fenn turned about and delivered that Stromberg stock for Avhich he had paid cash to the United States Independent Telephone Company,
How, in support of the defendants’ contention at the trial
Lastly, in determining the question whether the syndicate was behind the prospectus as its efficient cause, it should be remembered that the stock offered to subscribers for the bonds in this prospectus, at its date, was the stock then owned or thereafter to be acquired by the syndicate. The United States Independent Telephone Company could not issue its stock for cash for any less than 100 cents upon the dollar. In the prospectus, the sale of $17,000,000 of bonds was provided for. If all the Stromberg stock and all the Rochester Telephone stock were turned in to the United States Independent Telephone Company for bonds, those bonds, added to the $1,278,000 bonds given to Fenn as part payment for the Hew York Independent Telephone stock, would amount in the aggregate to exactly $12,000,000; and the remaining $5,000,000 to make up the $17,000,000, which were offered, would have to be taken for cash. Along with the bonds thus offered for cash was the offer of forty per cent, common stock which, upon $5,000,000, would amount to 20,000 shares. If the dealings proposed by the
Fenn was given no authority to sell bonds for the company as its agent. He held an option to purchase from the company its bonds for cash at par up to the total of $17,-000,000 (except the $1,278,000 given in part for Hew York Independent Telephone Company stock and the bonds given in exchange for Stromberg and Rochester Telephone stock). The bonds optioned by the company to Fenn for cash carried with them to him no bonus stock; but, when offered by Fenn to the public under the prospectus, the same bonds were to carry a bonus of forty per cent, stock furnished by the syndicate from the sources pointed out.
It would seem, therefore, that the syndicate, through Fenn, was the vendor of the stock and bonds offered for sale in the prospectus; and, if the prospectus in fact was false and fraudulent, those members of the syndicate who authorized the appointment of the managers who issued the prospectus, and those members of the syndicate who, coming into the syndicate after the managers were appointed, approved of the action which had already been taken concerning such appointment, are liable for any fraud committed by those managers in thus offering the property of the syndicate for sale.
It was not held at the trial that a member of the syndi
In Hornblower v. Crandall, 7 Mo. App. 220; affd., 18 Mo. 581, a well considered case, it is said: “Promoters of companies are not, indeed, merely as such, each other’s agents, or liable for each other’s acts. It was formerly held that persons engaged in establishing companies were partners, as they were acting together for a common object with a view of sharing gains; but such is not now the accepted doctrine. Lindsay Part. (ed. 1878), 31, 54, 240, and c. c. An association for forming a company is not necessarily a partnership, and the question is whether there is a basis of fact for the legal implication of agency. The principal is liable for the torts of his agents committed in the course of the principal’s business. It is no defense that the principal has not authorized the deceit, if it is committed in the matter intrusted by the principal to his agent. Where the deceitful contrivance is for the principal’s benefit, and done in the course of his business, the question, at its best, is, who of two innocent parties shall suffer ? And the rule is, as it ought to be, that he who has put his trust in the wrongdoer, and held him out to the world as a person to be dealt with, shall.bear the burden of his acts.”
The defendants Sibley and Watson participated in the organization of the syndicate, and must have consented to the selection of the managers; and if the defendants Holden, Eastman and Strong came into the syndicate knowing that managers had been appointed to control the affairs and shape the policy of the syndicate, and they, by silence or other conduct, acquiesced in the selection that had already been made, they then constituted the managers their agents for the remaining business of the syndicate. The defendants Ilolden, Sibley and Eastman were not specifically interrogated as to
If these conclusions are sound, it would follow that it is the duty of this court to set aside the verdict in favor of llessrs. Holden, Sibley, Watson, Eastman and Strong, and order a retrial of the entire case.
Therefore, an order may be entered setting aside the verdict in favor of the five defendants, Sibley, Watson, Holden, Strong and Eastman, on the ground that-the verdict is contrary to and against the weight of evidence, and granting a new trial, upon the payment by plaintiff of one term fee and all the taxable disbursements of said five defendants at the trial, with the costs of this motion.
Ordered accordingly.