129 N.Y.S. 819 | N.Y. App. Div. | 1911
Lead Opinion
Upon an appeal from a judgment sustaining a demurrer to a separate defense set up in the-answer the defendant attacks the sufficiency of the complaint, and as I do not think the complaint alleges a cause of action the judgment should not be-affirmed.
The complaint alleges that the American Ice Company, a corporation organized under the laws of the State of New Jersey, had issued preferred and common stock, and on January 23, 1902, the board of directors of said company declared a dividend of one dollar per share upon the common stock of the American Ice Company, payable to stockholders of record at the close of business on February 1,1902, which dividend was subsequently paid to the stockholders; that this dividend was not made or declared from the surplus or net profits arising from- the business of the said American Ice Company and the said dividend, was never earned by the said American Ice Company; that at the time of the declaration of this dividend the statutes of the
Thus the- basis of the plaintiff’s cause of action is that the directors of the American Ice Company by declaring a dividend on its common stock which was paid by the company represented that such dividend- was-to be paid out of its earnings and net profits; and without alleging that the defendant voted for such dividend or took any part in declaring it or made any representations about it, plaintiff seeks to hold this defendant for. his loss in a speculation in the stock because the defendants knew that the dividend was not pdid out of earnings or profits but intended that it should be understood by the public that it was paid out of earnings and profits. The corporation being organized under the laws of the State of New Jersey the legality of the acts of the directors must be determined by the laws of that State. The laws of that State prohibited the declaration of a dividend except from surplus or net profits arising
If no representation was made there can certainly be no-action based upon the falsity of a representation. -The statute prohibiting the declaration of such a dividend provided the penalty that should follow, but that was only a liability to the corporation itself or to a creditor, and then only in the event of the dissolution or insolvency of the corporation. Nothing else could happen to these directors because of their disobedience to this statute except such a liability to the corporation or its diréctors.
In speaking of a domestic, corporation which had declared a dividend in violation of the statutes of this State the Court of Appeals in People ex rel. Edison G. E. Co. v. Barker (141 N. Y. 254) said: “ That penalty, and the only one imposed,
The plaintiffs rely upon Keeler v. Seaman (47 Misc. Rep. 292), decided by Mr. Justice Scott, now a member of this court,.
I think, therefore, this judgment should be reversed, with costs, and the demurrer overruled, with costs, with leave, however, to plaintiffs to amend their complaint upon payment of costs in this court and in the court bélow.
McLaughlin and Scott, JJ., concurred; Miller and Dow-ling, JJ., dissented..
Dissenting Opinion
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.
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
' 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
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.