Story v. Richardson — 91 A.D. 381

Majority

p. 381

John H. Story, Respondent, v. Edward Richardson, Appellant.

Headnote

Action on notes given inpayment for corporate stock — a counterclaim for damages from, misrepresentations as to the financial condition of the corporation inducing a loan to it — effect of the fact that the misrepresentations also induced the purchase of the slock and of a denial of the counterclaim.

In an action brought upon two promissory notes made and delivered by the defendant to the plaintiff in payment for corporate stock purchased by the defendant from the plaintiff, the defendant is not entitled to interpose a counterclaim for damages resulting from the fact that by false representations made by the plaintiff to the defendant in regard to the assets and liabilities of the corporation, the defendant was induced to make a loan to the corporation, which loan he was unable to collect by reason of the falsity of the representations.

The transaction out of which the counterclaim arose did not arise out of and was not conneqted with the promissory notes which form the subject of the action,

p. 382

even though it be assumed, that the representations which induced the defendant to make the loan to the corporation also induced the defendant to purchase the stock from the plaintiff.

The counterclaim being one which, from its inherent nature, could not be lawfully interposed, the fact that the plaintiff replied thereto with a general denial, will not preclude him from successfully opposing proof of the counterclaim on the trial.

Appeajl by the defendant, Edward Richardson, from a judgment of the County Court of Queens county in favor of the plaintiff, entered in the office of the clerk of the county of Queens on. the 15th day of May, 1903, upon the verdict of a jury rendered by direction of the court.'

Eugene V. Daly, for the appellant.

Howard A. Sperry, for the respondent.

The, action is upon two promissory notes for $150 each, made and delivered by the defendant to the plaintiff. The notes express consideration, and the defendant testified on the trial that they were given foij certain stock in a corporation known as the Century Engraving Company belonging to the plaintiff and transferred, by him to the defendant at the time the notes were given. Neither the amount nor the value of the stock appears, nor was there any claim made upon the trial or any attempt to show that the value of the stock was less than the amount of the notes. The stock appears . to have been retained by the defendant without even an offer to return it and there was no claim or defense of a failure of consideration addressed specifically to the two notes in. suit. The answer alleges that “ any notes made by defendant in favor of plaintiff were procured through the willful misrepresentation of the plaiiitiff to this defendant, as to the assets and liabilities of the Century Engraving Company,” but such a general allegation cannot be regarded as raising an issue ' as to the validity of the notes in question.

The defendant, however, set up a counterclaim in the answer, and the real controversy arises upon the refusal -of the court to receive evidence offered in support of it. The counterclaim is set - forth as follows: “ Defendant as and for a counterclaim against the

p. 383

plaintiff, alleges that hy reason of the willful misrepresentation to defendant hy plaintiff of the facts in regard to the assets, liabilities and general condition of said Century Engraving Company, defend- ■ ant was induced to advance to said Century Engraving Company sums aggregating over five hundred dollars, which amount defendant lost, by reason of the condition of the said company being different from its condition as represented to defendant by plaintiff; that thereby defendant was damaged in the sum of over five hundred dollars.”

The plaintiff replied to the counterclaim by a general denial, and the learned counsel for the appellant claims that by omitting to demur to the counterclaim for insufficiency in the statement of facts, or to move to make the allegations of fact more definite and certain, the plaintiff waived the objection and could not, therefore, oppose the proof offered upon the trial to sustain the counterclaim which was thus placed in issue as a matter of fact by the reply. It is sufficient to say of this contention that the authorities relied upon to uphold it apply only to cases where the counterclaim which is imperfectly set forth is one which may lawfully be interposed in the action. In the earlier adjudications in this State it was indeed held that a. plaintiff by taking issue by reply to a counterclaim which was not legally admissible as such in the action waived the right to object to the admission of evidence to sustain it. Among those cases are Ayres v. O'Farrell ( 10 Bosw. 143 ) and Hammond v. Terry ( 3 Lans. 186 ). But the doctrine of those cases and others of similar import has since been overthrown^ and it may now be regarded as settled that there is no such waiver where the counterclaim is one which from its inherent nature cannot be lawfully interposed to the plaintiff’s claim. (See Smith v. Hall, 67 N. Y. 48 ; People v. Dennison, 84 id. 272 ; Dinan v. Coneys, 143 id. 544.) If the defendant has a valid claim against the plaintiff for the damages arising from his loan to the Century Engraving Company the judgmént in this case is, under the decisions of the Court of Appeals herein cited, no bar to its enforcement in a separate action, and the reasoning of the earlier cases for the conclusion reached necessarily fails.

It is provided by section 501 of the Code of Civil Procedure in effect that a counterclaim in an action founded on contract must

p. 384

be a cause of action also on contract, or one arising out of the contract or transaction set forth in the complaint as the foundation, of the plaintiff’s claim, or connected with the subject of the action. The defendant’s counterclaim is for damages for tort, the fraud alleged to have been practiced upon him by the plaintiff in making willful misrepresentations. The transaction in which- the claim arose is the loan alleged to have been made by the defendant to the corporation, and it is in no sense connected with the promissory notes which are the subject of this action, nor did it arise out of them. This would be so even if it be assumed that the same representations which induced the defendant to buy the plaintiff’s stock in the corporation and to give the plaintiff notes in payment for it also induced him to advance the money to the corporation, the loss of which constitutes the grievance which forms the basis of the counterclaim.

The judgment should be affirmed.

All concurred.

Judgment of the County Court of Queens county affirmed, with costs.

Cases cited

Ayres v. O'Farrell 10 Bosw. 143 N.Y. Super. Ct. 1863-01-05 p. 383
Hammond v. Terry 3 Lans. 186 N.Y. Sup. Ct. p. 383
Smith v. Hall 67 N. Y. 48 N.Y. 1876-09-19 p. 383