Brackett v. Griswold — 21 N.Y. St. Rep. 791

Majority

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Edgar T. Brackett, Administrator, etc., Resp’t, v. Chester Griswold, Impleaded, etc., App’lt.^[1]

(Court of Appeals,

Filed March 5, 1889.)

Headnote

1. Fraud—What must be shown to maintain action fob.

In order to maintain an action for fraud there must have been a false representation, known to be such, made by the defendant, calculated and intended to influence the plaintiff and which came to his knowledge, and in reliance upon which he, in good faith, parted with property or incurred the obligation which occasioned the injury of which he complains. All these circumstances must be found to exist, and the absence of any one of them is fatal to a recovery.

3. Same—Whose false bepbesentation would charge defendant.

It is not necessary that the false representation should have been made

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by the defendant personally. If he authorized and caused it to be made, it. is the same as though he made it himself.

3. Same—False representation made to whom will charge depend-ant—Who CAN MAINTAIN ACTION ON.

It is not necessary that the false representation should have been made directly to the plaintiff If it be made to the public at large for the purpose of influencing the action of any individual who may act upon it, any person so acting upon it and sustaining injury thereby, may maintain an. action.

4. Same—The injury must be caused by the proud.

In order to recover in an action for fraud and deceit the fraud and injury must he connected. The one must bear to the other the relation of causes and effect. It must appear in an appreciable sense that the damage flowed from the fraud as the proximate and not the remote cause.

5. Same—A reputation por solvency, acquired by an insolvent, not a GROUND OP ACTION.

That a corporation or an individual is reputed to he solvent, by reason of which, a person purchases individual or corporation securities, is not. alone a ground for maintaining an action for fraud against the debtor. The case is not strengthened by proof that this reputation was attributable to false appearances put on by the corporation or the individual, or that there was a holding out by them, by general representations or otherwise, that the corporation or individual was solvent and responsible.

6. Same—All actions por, governed by same principles.

The principles which govern an action for fraud and deceit, are the same, whether the fraud is alie red to have originated in a conspiracy or to have been solely committed by a defendant without aid or co-operation.

7. Same—Conspiracy—Allegation op—Effect op.

A mere conspiracy to commit a fraud is never of itself, a cause of action, and an allegation of conspiracy may he wholly disregarded, and a recovery had, irrespective of such allegation, in case the plaintiff is able otherwise to show the guilty participation of the defendant.

8. Same—Effect op omitting allegation op-conspiracy.

Whenever it becomes necessary to prove a conspiracy in order to connect the defendant with the fraud, no averment of the conspiracy need he made in the pleadings to entitled it to be proved. .

Appeal from a judgment of the supreme court, general term, third department, affirming a judgment in favor of the plaintiff, entered upon a verdict rendered by a jury.

This action was commenced in 1873. The original defendants were six of the seven trustees of the “Iron Mountains Company of Lake Champlain,” a corporation incorporated on the sixth day of August, 1869, by the filing on that day of a certificate under and in pursuance of the act, chapter 40 of the Laws of 1848, known as the manufacturing corporations act. The certificate was in due form, setting forth that the company was organized for the mining, manufacture and sale of iron and other ores; that the business was to be carried on in the towns of Westport and Elizabethport, in the county of Essex, and in the city of New York; that the capital stock was to be $2,000,000, divided into 20,000 shares; that the company was to continue fifty years, and that the six defendants, together with

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one John A. Griswold (who died before the commencement of the action) should be trustees of the company for the first year.

The complaint contains three causes of action. The first is founded on the alleged failure of the trustees to file a report as required by law, and to enforce in behalf of the plaintiff, a creditor of the company, the statutory liability arising from such failure imposed by the twelfth section of the act of 1848. The second cause Of action is framed "under the fifteenth section and sought to charge the defendants on the ground that the report of the company, made and filed January 13, 1870, in assumed compliance with the twelfth section, was false in representing that the •capital stock of $2,000,000 had been paid up in full. The third cause of action set forth a conspiracy between the defendants to form a sham corporation to defraud the public and the plaintiff, whereby the plaintiff was deceived and defrauded into giving credit to the company to his injury. The case was first tried by consent before the court, without a jury, and judgment was rendered against the defendants •on the first cause of action, for failure to file a report, but the court found in their favor on the second and third causes of action, the latter being the conspiracy count. This judgment was reversed by this court on the appeal of the defendants. 80 N. Y., 128 .

The case was again tried before the same judge, who rendered judgment against defendant Chester Griswold on the second count, on the ground that the report of January 13, 1870, which he, with other trustees, had signed, was false, but finding in his favor on the first and third counts. This judgment was also reversed by this court. 89 N. Y., 122 .

The action was next tried before a jury and resulted in a disagreement. The action was then tried before a judge without a jury, who found in favor of the plaintiff on the first and second counts, but in favor of the defendant Chester Griswold on the third or conspiracy count.

Before judgment was actually rendered the original plaintiff died, and by an order of the supreme court the action was revived, and continued in the name of his administrator, the present plaintiff. Judgment was then entered for the plaintiff on the decision of the trial court, and the defendants appealed from both the judgment and order of revivor, and both were reversed in this court, on the ground that by the death of Bonnell, the original plaintiff, the causes of action based' on the statutory liability abated. 103 1ST. Y , 425; 4 N. Y. State Rep., 419. But the court granted a new trial as to the third count.

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The action was then tried for the fifth time before a jury-on the third or conspiracy count, and resulted in a verdict, for the plaintiff against the present appellant for $11,780.95, and from the judgment entered therein this appeal is taken.

The third count alleged in great detail a fraudulent combination between the original defendants and John A. Griswold to organize the “Iron Mountains Company of Lake Champlain” with a nominal capital of $2,000,000, and to issue the whole stock to the “Kingdom Iron Ore-Company ” in pretended payment for about 1,300 acres of. undeveloped mining land in the county of Essex, owned by the latter company, worth not to exceed the sum of $50,000, which lands they were to cause to be conveyed to-the new corporation, and in which it is alleged the defendants, and John A. Griswold, as stockholder in the “Kingdom Iron Ore Company,” were interested. It is alleged. that this device of purchasing the lands by the new corporation for a sum vastly exceeding their value, was resorted to to enable the defendants to represent to the public that the whole capital stock of the new corporation had been paid in full, and that as a part of the fraudulent, scheme, persons of known financial and business ability, engaged in the mining and manufacture of iron, were to be made trustees of the company.

The complaint avers that the “ Iron Mountains Company of Lake Champlain ” was organized pursuant to this conspiracy—the purchase and transfer of the lands of the- “ Kingdom Iron Ore Company” in exchange for the stock of the former company, and the selection of trustees of the-new corporation; and alleges that these and other acts of the defendants specified, in organizing and setting on foot-the new corporation, were done “for the purpose of inducing credit to said new company, and inducing the public and individuals to loan money to and furnish materials for-said new company, and to purchase its bonds, notes, and other securities or evidences of indebtedness.”

It sets forth that in further pursuance of the conspiracy the defendants falsely published, advertised and represented “to the public at large and to the plaintiff, that the capital stock of the company was $2,000,000, and that the said stock was paid up in full and that the company was entirely solvent and responsible and had immense resources in its. mines, lands and other property,” and refers expressly to-the annual report of the company, filed January 13, 1870, which stated that the stock had been paid up in full, which, statement it alleges was knowingly false and untrue.

It appears from the complaint and evidence that on the 12th of March, 1870, the “Iron Mountains Company ”issued to the “ Birmingham Iron Foundry,” of Connecticut, its two-notes, payable respectively at four and six months, in the

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aggregate for $5,511.66, in consideration of machinery theretofore sold by the foundry company to the “Iron Mountain Company,” which notes the payee, before maturity, transferred to Bonnell in exchange for coal. The foundry company, when it applied to Bonnell to take the notes in exchange for coal, represented to him that they were good, but advised him to inquire of one Ellis, the treasurer of the “Iron Mountains Company,” whose office was in the city of Hew York. Bonnell inquired of Ellis as to the responsibility of the company and was informed by him that the company was good and that the notes would be promptly paid at maturity. Upon receiving this information he consented to take the notes in payment for coal ■to be delivered, and afterwards took them, but up to that time he supposed the notes were made by the “Iron Mountain Company of Missouri,” but before the transaction was completed, ascertained that they were the notes of the Hew York corporation. The complaint alleges that the Birmingham Iron Company and the plaintiff were induced to become ■creditors of said company by said representations so made by said defendants and said John A. Griswold before mentioned, which he relied upon, and also confiding in the general reputation of said company produced by said representations and report made to the public at large, and believing in consequence of the premises that said company was possessed of an actual paid up capital of two millions of dollars, and also induced thereto by the fact that said trustees were represented as being interested in said company and were men of large means, etc.

There is no evidence of the circumstances under which the notes were taken by the “ Birmingham Iron Foundry,” except that they were taken for machinery sold. Bonnell testified that when he took the notes, he did not know who were the stockholders or officers in the ‘ ‘ Iron Mountains Company,” except that Ellis was treasurer, nor the amount of its capital stock, and had never seen the “prospectus,” nor any report of the company; in short, that he knew nothing whatever, in respect to its property or condition, its officers or stockholders, or of any of the representations made by the defendants or the company.

The complaint avers the insolvency of the company, that the notes have never been paid, and it appears from the evidence, that the company was adjudicated a bankrupt in August, 1871, and that its whole property purchased of the Kingdom Company was sold in 1876, on a foreclosure of the trust mortgage, for about $5,000.

Wm. C. Holbrook and B. H. Bristow, for app’lt; Richard L. Hand, for resp’t.

The death of the original plaintiff has eliminated from the complaint, the causes of action founded

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on the statutory liability of trustees for a failure to make a. report, or for making a false report, imposed by the twelfth and fifteenth sections of the general manufacturing corporations act of 1848. So also, by the death of some of the-original defendants, and the discontinuance of the action against others, the action has become one against Chester Griswold alone, on the cause of action stated in the third or conspiracy count in the complaint. This cause of action was substantially one for fraud and deceit, by means of false pretenses, and the right of recovery is governed by the principles applicable to actions of that character. That this, is the nature of the action, was substantially decided in the case of Arthur v. Griswold ( 55 N. Y., 400 ), which was also-an action against the present defendant and others, the complaint, in which set forth a cause of action similar to that alleged in the third count of the complaint in this action. The allegation that there was a conspiracy to commit-the fraud, does not affect the substantial ground of action. The gravamen is fraud and damage, and not the conspiracy. The means by which a fraud is accomplished, are immaterial, except so far as they tend, in connection with the damage suffered, to show an actionable injury.

The allegation and proof of a conspiracy in an action of this character is only important to connect a defendant. with the transaction, and to charge him with the acts and declarations of his conspirators, where otherwise he could, not have been implicated. But a mero conspiracy to commit a fraud is never of itself a cause of action, and an allegation of conspiracy may be wholly disregarded and a. recovery had, irrespective of such allegation, in case the plaintiff is able otherwise to show the guilty participation of the defendant. In other words the principles which govern an action for fraud and deceit are the same whether the fraud is alleged to have originated in a conspiracy, or-to have been solely committed by a defendant without aid or co-operation. Whenever it becomes necessary to prove a conspiracy, in order to connect the defendant with the fraud, no averment of the conspiracy need be made in the pleadings to entitle it to be proved. These principles are well settled. The opinion of Chief Justice Nelson in Hutchins v. Hutchins ( 7 Hill, 104 ) contains an elaborate consideration of the subject, and- no other authority need, be cited.

The question in this case turns upon the point whether the evidence proved or tended to prove a cause of action against the defendant for false and fraudulent representations within the rules governing the common law action for fraud and deceit. There is no doubt or question as' to what elements are requisite to sustain an action for false

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pretences. The essential constituents of such an action have been understood from the time such actions were first, maintained. They are tersely stated by Church, Ch. J, in Arthur v. Griswold (supra), viz.: “Representations, falsity, scienter, deception and injury.” There must have been a false representation, known to be such, made by the-defendant, calculated and intended to influence the plaintiff and which came to his knowledge, and in reliance upon which he, in good faith parted with property or incurred the obligation which occasioned the injury of which he-complains. All these circumstances must be found to exist, and the absence of any one of them is fatal to recovery.. It is not necessary that the false representation should have-been made by the defendant personally. If he authorized and caused it to be made it is the same as though he made it himself.

Nor is it necessary that it should have been made directly to the plaintiff. If it was made to the public at large-for the purpose of influencing the action of any individual who may act upon it, any person so acting upon it and sustaining injury thereby, may maintain an action. It is on. this ground that promoters or directors of corporations-have been held liable for false representations in a prospectus, or report, or other papers issued by the corporation, with their sanction by which individuals have been induced to purchase the stock, or become creditors of the corporation, and the fact that the false report or prospectus purports to be the act of the corporation and not of the promoters or directors, does not relieve them from personal responsibility.

In view of the settled principles governing the action for fraud and deceit by means of false pretences, there is upon the evidence presented in this case an insuperable difficulty in maintaining the present judgment. There is no evidence that Bonnell, in purchasing. the notes, relied upon any representations made by the defendant. On the contrary, it affirmatively appears that at the time he was-wholly ignorant of the alleged fraudulent scheme under which the “Iron Mountains Company” was organized, and had no knowledge or information of any of the acts or representations of the defendant or the other parties to the alleged conspiracy set forth in the complaint. He knew nothing of the property of the company, nor of the amount of its capital stock, nor did he know who were the directors- or persons interested, and never saw or heard of the report of 1870, or of the prospectus prepared by Remington.

The trial - judge submitted the question of conspiracy to the jury, and whether the defendant Chester A. Griswold was -a party to it and knew of the prospectus, and also-

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whether he knew, at the time, that the statement in the report of 1870, signed by him, that the capital stock of 42,000,000 had been paid in full, was false and untrue. It is insisted by the defendant’s counsel that the evidence was insufficient to authorize a finding against the defendant Chester Griswold on these questions. . At the time of these transactions he was a young man twenty-four years of :age, employed by the firm of John A. Griswold & Co., at 'Troy, and had little, if any, knowledge of mining or mining property, and was made a trustee of the Iron Mountains Company without his knowledge at the time, and signed the report of January, .1870, at the request of his father, who was largely interested in mining property and in the manufacture and sale of iron.

It is claimed that the facts show that the defendant relied wholly on the statements of his father and Remington, and acted under his father’s directions in good faith, believing "the representations made in the prospectus and in the report of 1870, to be true. We deem it unnecessary to consider this contention. The jury have found adversely to the defendant upon these “questions of fact. But this does not relieve the case of the difficulty that assuming the facts to be as found, the plaintiff’s case, as proved, fails on the ground that Bonnell, when he took the notes, did not know ■of the illegal conspiracy or false representations, and consequently was not influenced thereby in making the purchase.

In order to recover - in an action for fraud and deceit, the fraud and injury must be connected. The one must bear to the other the relation of causes and effect, not perhaps in so -close a sequence as in action on contract. But nevertheless it must appear in an appreciable sense that the damage flowed from the fraud as the proximate and not the remote .cause.

In the statutory action against the trustees of a manufacturing corporation organized under the act of 1848, for making a false report, the statute dispenses with the necessity ■of showing any privity or relation between the act done .and the debt sought to be recovered. The liability to creditors is made absolute and exists irrespective of the fact whether they knew of the falsity of the report or relied upon the statements therein. But the statutory action abated by the deathrof Bonnell, and the plaintiff can now only pursue his common law remedy, and must abide by the ■conditions which attend it.

The court in the main charge to the jury, without referring to the rule that in an action for fraud or deceit, it must appear that the fraud produced the injury, charged that if fhe jury found “ that there was a conspiracy; that defendant was really a member of it, doing whatever was necessary to do to carry it out, and the object was to get credit

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for the corporation, with the expectation that the debts would not be paid, then he would be liable. If he was not. a member of the conspiracy and did not adopt it, then you. will render a verdict for the defendant.” Subsequently on the request made by the defendant’s counsel to charge, “that except the plaintiff relied upon the representations, they did not deceive him or cause him damage,” the court replied, “I hold that all he need rely on is that defendant (the company), was duly incorporated, and that there was. a good company.” This was excepted to, and the exception was, we think, well taken. It is undoubtedly true, that .Bonnell took the notes on the assurance of the “ Birming*ham Iron Foundry,” and of Ellis, the treasurer of the “Iron Mountains Company,” that the company was good, and the notes would be promptly paid at maturity. But neither-the “ Birmingham Iron Foundry,” nor Ellis, was the agent of the defendant, nor were they authorized by him to make any representations to Bonnell, and their statements did not bind him, nor was he responsible for them. Ellis is not charged to have been a co-conspirator, and it does not appear that he had any interest as stockholder, or otherwise, in the “ Iron Mountains Company.” That his declarations were inadmissible to charge the defendant, is clear from the decision in Arthur v. Griswold (supra), where a similar question was decided. It was not enough to entitle the-plaintiff to recover, that it appeared that he took the notes, believing that the company was good, or because the company was represented to be good, unless the representation was traced to the defendant. The complaint states, among other tilings, that Bonnell took the notes, “confiding in the general reputation of the company produced by the representations, etc. * * * That a corporation or an individual is reputed to be solvent, by reason of which a person purchases individual or corporate securities, is not alone a. ground for maintaining an action for fraud against the-debtor. Nor is the case in its legal aspect strengthened by proof that this reputation was attributable to false appearances put on by the corporation or the individual, or that, there was a holding out by them, by general representations or otherwise, that the corporation or individual was-solvent and responsible. The law exacts of every individual reasonable care to protect himself before he is permitted to charge another as the author of an injury.

In case of false pretenses there must be a specific representation shown, upon which the plaintiff relied. General reputation of solvency is quite an insufficient ground of reliance by a person who purchases securities in the market, although that reputation may have sprung from the con-duet of the defendant.

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The case of Peek v. Gurney (L. R., 6 H. L. Cas., 377) applies with great stringency the rule that to sustain an action for fraudulent representations, a close relation must he shown between the representations and the injury claimed, and also that the representations must have been made to influence the conduct of the plaintiff, or of a class ■of persons in which he was included. That case was much considered; and it was held that false representations contained in a prospectus issued to induce subscriptions to shares on the organization of a limited company, would not sustain an action in favor of one who was not a party "to the original subscription, but who afterwards having, ■seen the prospectus, and relying upon it, purchased shares in the market. The judges were of opinion that as the prospectus was intended on its face to influence only ■original subscribers, it was not available to sustain the plaintiff’s action; and that the representation, although the remote cause of the injury, was not so connected with it as to constitute as to the plaintiff an actionable fraud.

We think the case was submitted to the jury, upon a false theory. The judgment should, therefore, be reversed ■and a new trial granted.

All concur.