Reynolds v. Leyden — 24 A.D. 395

Majority

p. 395

John A. Reynolds, Appellant, v. Maurice Leyden and Others, Respondents.

Headnote

Corporation— liability of all the directors of a corporation to a party induced to make advances to it by the false representations of some of them — the report of its - receiver is evidence as to its financial condition.

In an action at law brought to recover damages from the directors and stockholders of a corporation because of their alleged fraudulent representations as to its prosperity and solvency, by which the plaintiff was induced to advance money to it and to become its president and managing director at a time when it was actually insolvent, it appeared that all the defendants participated in the benefit of the transaction had with the plaintiff, although all did not take part in making all the fraudulent representations in question.

Held, that the defendants who were active in consummating the fraud were to he deemed the agents of thosfe who were passive; and that it was the duty of the court to state clearly to the jury the extent to which the false representations shown to have been made by those defendants actively engaged in the transaction were binding upon the others.

In such an action the report of a receiver of the corporation who had been appointed in an action brought to wind up its affairs and distribute its assets, is available to the plaintiff as evidence of the amount of the property of the corporation and upon the question as to its solvency.

Appeal by the plaintiff, John A. Reynolds, from a judgment of the Supreme Court in favor of the defendants, entered in the office of the clerk of the county of Monroe on the 24th day of November, 1896, upon the verdict of a jury, and also from an order entered in said clerk’s office on the 21th day of November, 1896, denying the plaintiff’s motion for a new trial made upon the minutes.

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The defendants were officers and stockholders of a business corporation transacting its business in Rochester, New York, by the name of the “ Proetor-Raymond Electric Company.” The business of this company was manufacturing and selling electric bells, annunciators, electrical supplies and other electric goods under letters patent.

The. complaint alleges that, about the 1st of April, 1895, the defendant Leyden, acting in his own behalf and for the other "defendants, and in combination with them, in order to induce the plaintiff to become a stockholder in this company and president and managing director thereof, and to advance a large sum of money to the company, falsely and fraudulently represented to him that the business of the company was prosperous, a good paying business, and that their goods were sold at a large profit—some at a profit at least of 100 per cent, and the business only required a manager; that the estimated value of the materials and merchandise of the corporar tian on hand was $14,000, not including the patents, but that a true inventory would show it to be much more; that the company had money enough in the banks to provide for small bills coming due, and the debts of the company did not exceed $29,883.17; that defendant Leyden was the president, that Proctor was the vice-president, and Richards was the secretary and treasurer of the company, and defendant Roe was its counsel; that all the defendants were directors of the company, except Walker, who was a stockholder; that defendants Proctor, Richards, Raymond and Roe participated with Leyden in. these representations, and that they, with him, represented the other defendants after consultations had with them; that the plaintiff, relying upon these representations, consented to be elected as president and managing director of the concern, and that he advanced about $7,000 to the company ; that the representations were false to the knowledge of the parties making them, and that the plaintiff was thereby defrauded out of his money.

The defendants put in issue these several allegations in their answers, except that they admitted the existence of the corporation and the official relations of the defendants thereto, but they denied that the defendant Raymond was a director.

It appeared upon the trial, by the evidence of the plaintiff, that the representations set forth in the complaint were made to him;

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that he accepted the office of president and managing director; took charge of the business ; received stock in the corporation held by the several defendants and invested $7,000 in the business of the corpoi-ation, which the defendants, with others, had the benefit of; that, after managing the business for a few weeks, he discovered the fraud practiced upon him, dissolved his connection with the concern and sought to rescind the contract he made with it and commenced this action to recover damages; that the company went into the hands of a receiver; and there was evidence tending to establish the plaintiff’s cause of action, and that the corporation was insolvent at the time the plaintiff became connected with it.

Other facts will appear in the opinion of the court.

John Van Voorhis, for the appellant.

George F. Yeoman, for the respondents.

The only questions presented by the appellant upon this review relate to the rulings of the trial court as to the admission and effect of evidence.

The chief complaint of the appellant is that the trial judge so ruled upon the application of the evidence as to the several defendants, and as to all of them, as to confuse the jury and leave their minds in a state of uncertainty as to the responsibility of any or all of the defendants for the fraud that the plaintiff claims was perpetrated upon him.

Early in the course of the trial the plaintiff’s counsel proved the incorporation of the “ Proetor-Raymond Electric Company,” which occurred on the 30th of March, 1893, and that all the defendants had heen named as directors in the articles of incorporation, except Nelson H. Raymond, and that the defendants were the principal stockholders in the corporation; that its capital stock had been increased from $20,000 to $30,000 by the stockholders, the defendants participating therein, and they were active in carrying on the business of the corporation for two years prior to the 1st day of April, 1895 ; that the plaintiff, being desirous of engaging in some business, met the defendant Leyden and had a conversation with him about going into the company ; that he had taken the plaintiff

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to the works of the corporation in Rochester, and had introduced him to the defendants Proctor, Raymond and Richards, and had said to Proctor and Raymond that the plaintiff wanted to look through the works and see how the business was carried on, and to show the plaintiff through, which they did; that afterwards the representations contained in the foregoing statement were made to the plaintiff principally by Leyden, and to some extent by Proctor, Richards .and Raymond; and in the course of stating the representations objection was made by the defendants1' counsel that the evidence was incompetent as against each of the defendants except Leyden and Richards. The court held that it would receive the evidence “ at present as simply against the defendant Richards,” to which ruling the plaintiff’s counsel excepted. The particular evidence that the objection was aimed at was to a statement made by Richards.

A similar ruling and exception was had as to the statements of Leyden to the plaintiff, the court confining the evidence to Leyden alone A number of rulings followed of the same character, some of which were excepted to while others were not, the court in each instance confining the evidence to the particular defendant or defendants who made the statement. Further proof, was given by the plaintiff tending to connect all of the defendants with the transaction which resulted in obtaining the money. A statement of the liabilities of the company was made from its books, which was presented to the plaintiff by the defendants Leyden and Richards and offered in evidence, but it was excluded as against all of the defendants except Richards, Leyden and Raymond. The plaintiff then offered in evidence a written agreement between the plaintiff and all the defendants except Proctor whereby the defendants executing the paper transferred stock held by them severally to the plaintiff as a part of the transaction of obtaining the plaintiff’s money. This was received without objection.

It is unnecessary to set forth in detail all the evidence connecting the defendants with obtaining the plaintiff’s money, as enough was shown to raise a question for the jury whether the defendants were not all connected with the active defendants who did the business with the plain tiff,'and whether the act of each defendant, therefore, in carrying out the general purpose of all the defendants, was evidence against all. If any doubt existed, for want of proof as to the gen

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eral purpose at the time that the first exception was taken to the rulings we are considering, as to the competency of the evidence against all of the defendants, it ceased to exist after the plaintiff’s proof was all submitted upon the subject.

At the close of the evidence and before the charge of the court, the record discloses the following: “ Whereupon, the counsel for plaintiff asked the court to rule that, by taking the benefit of the fraud, though otherwise innocent grantors, they made Leyden their agent. The court stated, 61 received that evidence in the beginning as to Leyden only, and now as against these defendants I,will allow it to stand as I held then.’ The plaintiff’s counsel excepted.”

The court then charged the jury, referring to some extent to the evidence, but omitted to state the applicability of the evidence we have referred to, whether to all the defendants or otherwise.

At the close of the charge the following occurred: “ Hr. Yeoman (the defendants’ counsel) asked the court to charge that there is no right to recover as against Osgoodby by-reason of any statement made by Leyden to the plaintiff. Declined and exception. Hr. Yoeman: I make the same request in behalf of Hclienney, Roe, Richards, Walker, Proctor and Raymond, each separately. Declined and exceptions for each separately.”

The same request was made on behalf of Osgoodby by reason of any statement made by Richards to the plaintiff. The same request in behalf of McKenney and each of the other defendants. Also in behalf of Osgoodby- by reason of any statement made by Raymond. Also same request as to each of the other defendants separately. Also in behalf of Osgoodby by reason of any statements made to plaintiff by Proctor and the same request as to each of the other defendants. And the same as to the defendant Roe. All of which requests the court declined to grant.

It is claimed by the learned counsel for the respondents that the court having declined to charge as above stated, it was equivalent to the court finally charging the jury that the statements and representations of Leyden, Richards, Raymond and Roe (the four active parties to the transaction) was evidence against all of the defendants and cured any error, if any, that occurred in the rulings of the court upon the reception of the evidence. In this we cannot concur. These facts establish that the appellant’s contention is well

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founded. It was the duty of the court to clearly state to the jury the extent to which the evidence of the representations of Leyden and others was binding upon all th'e defendants so that they might act intelligently upon the subject.

To the lay mind, at least, the different rulings, the refusal to apply the evidence of the statements of the active defendants to all the defendants as requested before the charge was made, coupled with the simple declension to charge as requested, would cause much doubt and uncertainty as to how they might regard the evidence, whether they should hold it binding upon a portion only or upon all of the defendants; and, if this responsibility was to be apportioned among the defendants, how it should be done; and under such uncertainty the jury might be led to a verdict exonerating all of the defendants as-the only solution of the difficulty, when, if they had been properly charged, the result might have been otherwise.

We are now led to consider whether the evidence was applicable to all the defendants.

It is claimed by the respondents’ counsel that the defendants who took no part in making the representations upon which the plaintiff relied were innocent of any intent to defraud, and that their participation in the benefits in the transaction does not make them liable in this action of fraud, and they can only be made liable in equity.

It was said in Garner v. Mangam ( 93 N. Y. 642 ), an action to recover damages for an alleged fraud, where it was claimed that false representations had been made by one of the. defendants to induce the plaintiff to purchase stock and where several defendants had united in the sale of the stock, as follows: “ It was not a sale of forty shares by each defendant, separately, but a sale of one hundred and twenty shares as one parcel, made up by a contribution of forty shares by each defendant. "Each, therefore, became the agent of the others in making the sale, and each became responsible for the representations made by the others. Pratt could not receive the fruits of the bargain without being responsible for the fraud through which it was effected.” (Citing many cases.)

In Krumm v. Beach ( 96 N. Y. 398 et seq.), which was an action against husband and wife for fraud in the sale of land, it appeared that the husband assumed to act as agent for the wife, and made the representations complained of without her knowledge. The title to

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the land conveyed was in the wife, and she conveyed it, retaining most of the proceeds of the sale. The wife was held liable, and Judge Finch says, at page 404:' “The case, therefore, is brought within the rule which makes her receipt and retention of the fruits and product of the fraud involve a liability on account of it, although herself innocent of personal participation in the wrong.” (Citing Garner v. Magnam, supra, and other cases; Crans v. Hunter, 28 N. Y. 389 .)

A principal cannot claim the benefit of a purchase obtained by his agent by the use of misrepresentations and at the same time repudiate the representations as unauthorized. (Lane v. Black, 21 W. Va. 617 , cited in 1 Am. & Eng. Ency. of Law [2d ed.], 1192.) And such is undoubtedly the law of this State whatever conflict upon this subject may have existed elsewhere.

The plaintiff’s counsel offered in evidence the report of a receiver who had been appointed in an action to wind up the affairs of the corporation and distribute its assets. The defendants’ counsel objected to this, which was sustained and the evidence excluded. We think that this report should have been received, as it was competent. upon the question of the amount of the property of the corporation and as to its insolvency. The error, however, was not a serious one, as the receiver testified that he received altogether §9,095.75 of the assets of the concern, and that the debts altogether exceeded §32,000.

The foregoing leads to the conclusion that the judgment and order appealed from should be reversed and a new trial granted, with costs to abide the event.

All concurred, except Adams, J., not voting.

Judgment and order reversed, and a new trial ordered, with costs to the appellant to abide the event.

Cases cited

Garner v. Mangam 93 N. Y. 642 N.Y. 1883-10-02 p. 400
Krumm v. Beach 96 N. Y. 398 N.Y. 1884-10-07 p. 400
Crans v. Hunter 28 N. Y. 389 N.Y. p. 401