p. 646Adolph Rothmiller, Respt, v. Theodore G. Stein et al., App’lts.(New York Common, Pleas, General Term,Headnote
1. Fraud—Directors of corporation.The agents of a corporation are subject to the common rule imposing, upon a party making a false representation whereby another is misled, a liability for its direct consequences.
3. Same—Duty of stockholder.
Where the directors of a corporation make false representations as to the financial condition and state of earnings of the company, a stockholder may rely upon them m disposing of his stock and is not bound in any way to verify such report, though he had the opportunity.
Appeal from interlocutory judgment overruling demurrer to complaint.
Guggenheimer, Untermeyer & Marshall (Louis Marshall, of counsel), for app’lts; Kohn, Buck &. Lipmann ( William J. LApmann of counsel), for resp’t.
The actjon is brought against two managing officers of a corporation to recover damages for false representations as to the financial condition and state of earnings of the company, relying upon which the plaintiff, a stockholder, availed himself of a certain alternative offer for the purchase of his stock made to him by one Moore, a fellow stockholder. It is alleged that by reason of the "falsity of these representations, plaintiff was damaged in the difference between'the sum obtained by him upon this sale and the amount which, but for the - representations he would have accepted and received from Mqore upon acceding to the latter’s proposition in the alternative other than that which he actually accepted. This offer was for the purchase of plaintiff's stock at $80 per share, in cash, or for the sum of $50 per share, in cash, and the further sum of $50, pajmble if the dividends declared by the corporation during the succeeding year should amount to ten per cent. Relying upon the representations made by defendants,
p. 647plaintiff accepted the latter offer, and by reason of the actual condition of the company, the contingent payment from Moore never became payable. -The statements alleged, and here admitted to have been made, with regard to the actual condition of the corporation, were certainly of a nature to justify the action of the plaintiff in accepting the offer in the alternative mentioned, and that plaintiff was damaged by this acceptance clearly appears from the allegations. The pleading is not open to criticism with regard to'the essential allegations of falsity and knowledge. For appellants it is contended that there was no damage to plaintiff, for a true report as to the condition alleged to have existed at the time (actual insolvency), would have precluded plaintiff’s acceptance of the advantageous offer without fraud as against Moore, but this is not a tenable position in view of the nature of the action. . Consistently with the established theory of 'an action for deceit, the damages are here claimed to have been sustained by plaintiff though his reliance upon the representations made. It does not appear that Moore’s offer was in anyway connected with the representation or that he knew of the report thus made which appears to have been for plaintiff’s supposed enlightenment alone. The proposition is alleged to have been an independent one, coming unsolicited. Plaintiff was called upon to exercise an option, should he assent to this proposition, and, while so assenting, he made his election in reliance upon the defendant’s representations and was thereby damaged, as subsequently appeared. He was not bound to so rely. He might, in disregard of the representations, have accepted the other alternative held out and have obtained the sum now claimed, without any possible fraud on his part as against Moore. But by his reliance he was damaged in the difference noted and the cause of action accrued. The false representations alone did not create this cause of action. Defendants having chosen to make such representations, their liability was suspended upon the plaintiff’s justifiable acts of reliance with the consequent damage as shown. $
Agents of a corporation are subject to the general common law rule imposing upon a party making a false representation, whereby another is misled, a liability for its direct consequences. Morawetz Corp. Sec. 573. Plaintiff was not bound in any way to verify the report given him by defendants as directors, although it must be assumed that he had the opportunity. The corporation was organized under the laws of the state of Hew Jersey, and by the common law,, which is presumed‘to obtain in such a case as the present, Whiteford v. Panama R. R. Co., 23 N. Y. 465 . Waldron v. Ritchings, 3 Daly, 283 , plaintiff had access to any one or all of the books and records of the corporation (Cook on stock and stockholders § 511), yet to defendants he owed no duty of vigilance, they being the parties guilty of the fraud as against him, and he was under no obligation to ascertain the facts with regard to representations, as to the truth of which the defendants, with peculiar means of knowledge, had pledged their faith. See Wright v. Denniston, 59 St. Rep. 549 , 551. It is not necessary to discuss the allegations of mismanagement. That the complaint is
p. 648to be upheld only upon the theory of an action for deceit, appears to be conceded by the parties, and is clear upon the reasons given at special term. We find no force in appellant’s argument to the effect that a negative and not a positive act was done by plaintiff in reliance upon the representations and that this was therefore not properly action." The argument is based upon the absence of any cases where the facts have disclosed a failure to perform a certain act, as the basis of an action for deceit but the point is without application in this case. The'active exercise of an election is certainly to be thken as action and this exercise, relying upon the representations, was the basis of plaintiff’s damage. ‘ It follows that the judgment must be affirmed with costs; leave to defendants to answer upon payment of costs. Bookstaver. P. J., concurs.