Cohen v. Ellis — 23 N.Y. St. Rep. 420

Majority

p. 420

Alfred A. Cohen, App’lt, v. John W. Ellis, et. al., Resp’ts.

(Supreme Court, General Term, First Department,

Filed March 29, 1889.)

Headnote

1. Complaint—Demurrer—When complaint fatally defective—Contract—Action to rescind because of fraud.

The complaint alleged that the plaintiff had been induced by the fraudulent representations of the defendants to purchase certain bonds and stock of a railroad company which was in fact insolvent, and claimed to rescind the contract of purchase because of the fraud, and demanded the return of the money paid therefor, hut the complaint did not allege that the plaintiff had returned or offered to return to the defendants the bonds and stock which he had received from them. Held, on demurrer, that the complaint was fatally defective.

2. Same—When complaint insufficient to authorize rescinding of CONTRACT.

The complaint further alleged, by way of excusing or avoiding the necessity of averring the return of the bonds, that the stock and bonds originally received by the plaintiff were afterwards surrendered and can celled, and new bonds to the amount of fifty per cent of the original bonds of a new company formed to carry on the construction and completion of the road, were issued to and accepted by the plaintiff in lieu thereof; the plaintiff further alleging that the scheme for the formation of the new company, and the issuing of the new bonds was instigated by the defendants, and that the plaintiff was induced to make the surrender and change the bonds, believing that the defendants had advised the exchange, but there was no allegation that information furnished to plaintiff was different, or was furnished in a different manner than the information to other bond holders, or that the defendants had in any way consented to the surrender and change made by the plaintiff. Held, on demurrer, that the complaint was insufficient, and did not show facts which would authorize the rescinding of the original contract, and entitle the plaintiff to the recovery of the moneys paid for the original bonds.

8. Same—What must be done to entitle party to rescind.

It is a well settled rule of law that to entitle a party'to rescind a contract, because of the fact that he was induced to enter into it by means of false and fraudulent representations, he must first return, so far as he may not be prevented from doing so by the action of the defendant,. whatever he has received through the performance of the contract; must offer or tender by way of return to the other party, all that has been received by him as the fruits of the contract.

4. Samb-tí-Revtsion—Nature of property cannot be changed and return offered—Offer to return must be of same property.

The party proposing to rescind cannot deal with or change the nature of the property received by him, and then insist upon the right to rescind, by returning the article in that manner coming into his possession, and it is no answer to the objection made, that the property offered to he now returned, is, in fact, more valuable than the original property would now be, if in plaintiff’s hands, and tendered to defendants.

p. 421

Appeal from an interlocutory judgment sustaining demurrers to the complaint.

William G. Choate, for app’lt; Joseph H. Choate, B. H. Bristol, Howard Mansfield, Hugh L. Cole and William C. Gulliver, for resp’ts.

This action was before this court in a preceding appeal from a judgment overruling a demurrer to the original complaint. That judgment was considered to be erroneous for the reasons at the time assigned, and it was reversed, with liberty to the plaintiff to amend the complaint and bring in another party. Cohen v. Ellis, 4 N. Y. State Rep., 721.

It was then considered that the representations relied upon and set forth would entitle the plaintiff to rescind the contracts made for the purchase of the bonds. But as the defendants acted as agents for the construction company, that company, or its receiver, should be brought into the action, in order to entitle the plaintiff to maintain it.

Since that decision was made, the complaint has been amended, and the North River Construction Company, the party at that time omitted, together with its receiver, have been added as defendants in the action. In this manner the objection which was then found to exist to the right of the plaintiff to maintain the action has been removed, but another and different objection is now presented to the ability of the plaintiff, or of his executrix, he having died since the judgment to maintain this action

The bonds which were purchased by the plaintiff were issued by the New York, West Shore and Buffalo Railway Company. After their purchase, default was made by the company in the payment of its secured debts, and an action was commenced by the trustee in the mortgage given to secure the bonds, to foreclose the mortgage and sell the mortgaged property. While this action was pending a scheme, was set on foot through which the railway property should be sold for the benefit of the owners, of the bonds, and a new company organized to take the property under the sale, from the committee appointed to purchase it, and this new company should issue bonds not exceeding in amount fifty millions of dollars, bearing interest at four per cent, and ten millions of dollars of capital stock, and such bonds should be secured by a mortgage upon the property, and guaranteed by the New York Central and Hudson River Railroad Company, which company should take a lease of the property sold for a long term of years.

Under this arrangement, or plan, the railway property encumbered by the mortgage for the security of the bonds issued by the New York, West Shore and Buffalo Rail

p. 422

way Company, was sold, and purchased by the committee acting for the bondholders. And under their agreement and authority the West Shore Railroad Company was organized, the property conveyed to it, and the fifty millions of bonds issued by it The lease agreed upon was also executed to the New York Central and Hudson River Railroad Company, and that company guaranteed the bonds of the West Shore Railroad Company. These bonds issued and guaranteed in this manner were, under the scheme which had been adopted and acted upon, to be exchanged at the rate of fifty cents on the dollar for the bonds of the New York, West Shore and Buffalo Railway Company. And a time was prescribed within which the exchange should take place, and after which it was not to be permitted.

This exchange was to be made by a deposit of the bonds of the old company with Drexel, Morgan & Co. And a sufficient number of bonds were so deposited as to entitle the plan, or scheme, to be carried into execution. A circular was issued by this firm in July, 1885, informing the bondholders of the re-organization plan, and of the necessity for depositing their bonds, to receive in exchange this per centage of the new bonds of the West Shore Railroad Company. After this circular was received" and the plaintiff had obtained information concerning the teims which had been prescribed, he did deposit his two hundred bonds of one thousand dollars each, with Drexel, Morgan & Co., and received from them one hundred bonds of one thousand dollars each, issued under the new organization, and guaranteed by the New York Central and Hudson River Railroad Company. These newly issued bonds are stated to be of the value of one hundred and three thousand dollars, while the two hundred bonds issued by the New York, West Shore and Buffalo Railroad Company, would be of no greater value in any event than the sum of forty-six thousand dollars. And it is proposed, in order to entitle the plaintiff to maintain this action, that the new bonds shall be surrendered up and accepted by the defendants in place of the two hundred old bonds received under the original contracts for their purchase, and those contracts shall be rescinded and the plaintiff permitted to recover the amount paid by him for the bonds, and the stock delivered to him accompanying the bonds.

It will be seen from this statement that the bonds which the plaintiff was induced to purchase by the fraudulent representations, made the subject of the complaint, have been wholly surrendered and passed beyond his control, under the arrangement made to complete the foreclosure, and form and organize the new company to take and operate

p. 423

the railway, which was encumbered as security for those bonds.

They are no longer in his hands or under his control, but have been retired and extinguished as existing demands. And the point, therefore, arises whether he may still insist upon the rescission of the two contracts made for the purchase of these bonds, by returning the newly issued bonds, and recover from the defendants the purchase money paid for the old bonds. In answer to this position, which has been taken and maintained with great zeal and ability on the part of the plaintiff, the legal rule has been relied upon that to entitle a party to rescind a contract because of the fact that he was induced to enter into it by means of false and fraudulent representations, he must first return, so far as he may not be prevented from doing so by the action of the defendant, whatever he has received through the performance of the contract. This rule has been repeatedly asserted and often acted upon in litigations of this description by courts of justice. And with unexceptional unanimity in all well-considered cases, the courts have adhered to the rule, that before any agreement which the party may be entitled in this manner to rescind, can be rescinded, he, or it, must offer, or tender, by way of return to the other party, all that has been received under, or as the fruits of the contract. Cobb v. Hatfield, 46 N. Y., 533 ; Sharpley v. Louth, etc., R. R. Co., 2 L. R. Chy. Div., 663, 685; Grymes v. Sanders, 93 U. S., 55 ; Graham v. Meyer, 99 N. Y., 611 ; Neblett v. MacFarland, 92 U. S., 101 ; Gould v. Cayuga Bank, 86 N. Y., 75 .

The party proposing to rescind is not permitted to deal with or change the nature of the property received by him, and then insist upon the right to rescind, by returning the article in that manner coming into his possession. This was considered in Sheffield Nickel, etc., Co. v. Unwin (L. R., 2 Queens B. Div., 214), where the contract was not allowed ■ to be rescinded, although it might have been done if the property to be returned had not been changed by the act of the plaintiff. The same rule was followed in McCrillis v. Carlton (37 Ver., 139), when the defendant was not allowed to rescind a contract for the purchase of butter, after he had sold the article so purchased. In Scovil v. Wait ( 54 N. Y., 650 ), a quite similar decision was made in this state. And so it was in Snow v. Alley ( 144 Mass., 546 ). This case underwent an elaborate examination, and the conclusion already mentioned was reached and sustained by the court. And in Francis v. N. Y. and Brooklyn R. R. Co. ( 108 N. Y., 93 ; 13 N. Y. State Rep., 87), the plaintiff had received shares of stock from the defendant, which he

p. 424

afterwards surrendered, and new certificates were issued at his request to each one of his three minor children.

And it was held by the court that this prevented him" from rescinding the transaction. And it was there said that: “The theory of a rescission is that the party proceeded against shall be restored to his original position. The plaintiff cannot rescind if he retains in himself, or withholds through another, any fruit of the contract.” Id., 97 .

It is no answer to the objection made, that the bonds now offered to the defendants are more valuable than those held by the plaintiff at the time of the commencement of this action, for they are not the bonds received by him under his contracts of purchase, and the defendants have entered into no obligation whatever to accept the new bonds in the place and stead of those originally issued.

Allegations were made in the complaint to relieve the case of this disability. They consist of statements that it was at the instigation and request of the defendants, Wins-low, Lanier & Co., and the Construction Company, and the defendant Green, that the circular of Drexel, Morgan & Co. was issued to him, containing the information relative to the reorganization, and the surrender and change to be made in the bonds; and that he, believing that the defendants Winslow, Lanier & Co. had advised the exchange, was induced to make it. But these allegations are inferential in their nature, not supported by any facts permitting them to be made. The facts, on the contrary, are that the, plaintiff wrote to these defendants, stating that he should deposit the old bonds received from them, unless by the 20th of August, 1885, he was advised that a greater sum could "be realized for them than by the acceptance of the new bonds. To this they did not reply, with the exception of one of the firm, and his answer was that any deposit which should be made by the plaintiff of the two hundred bonds, would be entirely in his own responsibility, and without any authority or consent on the part of this member of the firm. Neither of the others answered the letter written to them by the plaintiff, and neither consented in any manner to the exchange in' the bonds for the purpose of affecting the relation in which they stood to the plaintiff in this action. What was done, and all that appears te have been intimated, proceeded upon the fact that the plaintiff was the owner of the two hundred bonds, and that it would be for his advantage as such owner, and not as plaintiff in this action, to make the exchange and receive the new bonds. It appears from the complaint, that these defendants have throughout denied all liability, and all accountability, to the plaintiff, as well as his right to rescind the original purchases, and in that manner entitle himself to the recovery of the money he had paid for the bonds.

Their action, so far as he was to be affected, was the same as it was with reference to the other owners of bonds

p. 425

issued, by the New York, West Shore and Buffalo Railway Company. They were all alike, supplied with the same information for them to act upon in making the proposed exchange, presenting the advantages expected to arise from that exchange. Nothing whatever is shown to have transpired through what in this manner was done and accomplished, from which it can be assumed that these defendants consented that the new bonds might be taken, under the reorganization, and those new bonds presented to the defendants, or used by the plaintiff, for the purpose- of bringing about a rescission of the original purchases. In this resnect; the case presented by the complaint appears to be radically defective, digsbllllg thS plaintiff, as the-facts have been made to appear, from * rescinding' . original purchases, in the manner in which it is proposed that it shall be done, and entitling himself to a recovery of moneys paid for¡?the original bonds.

The judgment accordingly should be affirmed, with costs, but with leave to the executrix, who has now been made a party to the action, to amend the complaint within twenty days, on payment of the costs of the demurrer and of this appeal.

Brady, J., concurs.