Mabey v. Adams — 16 N.Y. Super. Ct. 346

Majority

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Henry Mabey et al., Administrators, Plaintiffs and Respondents, v. William Adams, Defendant and Appellant.

Headnote

1. A director of a banking association is not liable to one who becomes a stockholder, for false statements in the articles of association respecting the amount of capital actually subscribed and paid in, by which hp was induced thereafter to become a stockholder.

Ü. One who purchases stock in a banking association from the association itself cannot maintain an action against a director of the association for violations of the statute relating to moneyed corporations which occurred before he became a stockholder, although the value of the stock is depreciated by reason of such violations of the statute.

3. A complaint in an action to recover from a director damages for falsely and fraudulently representing that the stock of a bank is worth par, by which the plaintiffs’ intestate was induced to purchase stock from the bank, when in truth the stock was worthless and óf no value and was wholly lost, is bad when it does not aver that the defendant knew that the stock was not worth what he represented it to be, nor that the defendant made the representations with the intent to induce the plaintiffs’ intestate to become a purchaser.

4. Specifications of losses sustained by reason of becoming a stockholder in an insolvent banking association by being compelled to contribute under the statute to the payment of its debts, are only particulars of damage, and do not alone constitute causes of action; whether they can be recovered or not depends on the sufficiency of other parts of the complaint to charge the defendant with liability therefor.

5. Banking associations organized under the general banking law are within the provisions of the Revised Statutes, to prevent the insolvency of moneyed corporations. (1 R. S., part 1, ch. 18, tit. 2, art. 1, § 10.)

(Before Hoffman, Slosson and Pierrepont, J. J.)

Heard, April 12th;

decided, July 3d, 1858.

This action is brought by the administrators of Robert L. Mabey, deceased, who, on the 28th of October, 1854, became a stockholder in the Empire City Bank, (a banking association formed under the act of 1838), against the defendant, a director of the bank, to recover damages for violation of the provisions of part 1, chapter 18, title 2, article 1, section 10 of the Revised Statutes, alleged to have been committed by the defendant, as such director, between January 1, 1852, and October 23, 1854.

It also claims to recover damages for false statements con

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tained in the articles of association and for misrepresentations of the value of the stock made by the defendant, by which the intestate was induced to buy the stock.

The plaintiffs claim the sum of $2,000, the amount paid by the intestate for the stock, and the amount of an assessment against the stockholders, under the act of 1849, amounting to $977.08, which assessment was made after the death of Mabey, and which has not been paid by the plaintiffs.

To this complaint the defendant demurred.

The demurrer was argued at Special Term before Mr. Justice Hoffman, in February, 1858, and the demurrer was overruled.

From the order of the Special Term the defendant appeals to the General Term.

Jno. M. Mason, for the defendant (appellant).

I. The complaint does not state facts sufficient to constitute a cause of action.

1. It does not appear by the complaint that the defendant was a stockholder at the time of the commission of the grievances charged.

The defendant is sued under a special statute, entitled “Regulations to prevent the insolvency of moneyed corporations, and to secure the rights of their stockholders and creditors.” (1 R. S., 589, 4th ed., 1113.)' And the claim is founded on section 10 of that statute.

a. The director cannot be liable for an act to owners at different times of the same stock, and the party buying the stock after the unlawful act of the director, buys it at its then value as reduced by such unlawful act, and cannot, therefore, recover for the violation of the statute committed before such transfer, the loss having been sustained by the previous owner, and he having a right of action (if any) against the director.

b. The right to recover against the director is given by section 10 to the stockholders. It is not an incident of the stock. It vests in the holder, and a transfer of the stock does not carry with it the rights of such holder against the director.

2. The representations contained in the articles of association are not violations of the statute. No such violations could be

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made by a director at that time. All such statements in the articles of association proceed from the associates. (1 R. S., 4th ed., p. 1146, §§ 166, 167.)

3. It does not appear that Mabey bought the stock, in consequence of the misrepresentations so charged.

4. Nor does it appear that Adams was a director at the time of the filing of the articles of association.

5. The particular loans made, and their amount, should be specifically charged, and the loss chargeable to each violation of the statute stated, or at least the amount of excess of loans, and the loss accruing from such excess charged.

6. The violations of each particular portion of the act, and the loss accrued thereby, should be separately stated. A director who violates “any provision” is liable for the loss sustained, by reason of such “violation.” (Franklin Ins. Co. v. Jenkins, 3 Wend., 130 ; Gaffney v. Colvill, 6 Hill, 567 , 579.)

7. The eighth subdivision is bad.

a. It does not appear that any judgment has been rendered against, or liability incurred by the administrators.

h. It does not appear that the administrators have paid any such judgment, or have any assets from which to pay it, or that the money, if recovered from Adams will, in the due distribution of the estate go to the payment of this judgment.

II. Several causes of action have been improperly united.

1. If it should be held that subdivisions 7 and 8 charge the defendant, in his individual capacity, and not as a director, then there is a union of a cause of action, against a director, arising under a special statute, and who is a trustee by operation of law, with a cause of action against an individual for a false representation. (Hall v. Fisher, 20 Barb., 442 ; Lucas v. N. Y. Central R. R., 21 Barb., 245 ; Landau v. Levy, 1 Abb., 376 ; McMahon v. Allen, 3 id., 89; Dornan v. Kellam, 4 id., 202; Sweet v. Ingerson, 12 How., 331 .)

2. The various causes of action are all improperly joined in subdivision six of the complaint, in which, all the previous wrong-doings of the defendants are made the cause of the entire damage to the stock to the extent of $2,000. (Gaffney v. Colvill, 6 Hill, 567 ; Durkee v. Saratoga R. R. Co., 4 How., 226 ; Sweet v. Ingerson, 12 id., 331 .)

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3. The claim in. subdivision 6, for the value of the stock paid by the intestate, is improperly united with the claim for the liability incurred by the executors, as stated in subdivision 8.

III. The directors of a banking association, incorporated under the General Banldng Law of 1838 and the subsequent amendatory laws, are riot liable. (Sec. 10, art. 1, tit. 2, ch. 18, part I, of the R. S.)

1. The act, as first passed in 1828, referred only to the officers of what were then known as “ moneyed corporations.” It did not refer to banking associations.

2. The principle of the formation of banking associations, and of the duties of their officers, and the rights and remedies of their stockholders and creditors, is entirely different from that of the banks existing in 1828, and of the Safety Fund Banks under the Laws of 1829. (Compare 1 R. S., 4th ed., p. 1113, &c., with p. 1123, &c., and p. 1141, &c.; See 1 R. S., 4th ed., p. 1123, § 1; Also, p. 1117, §§ 20, 21; p. 1148, §§ 178, 179, 189; See also p. 1118, §§ 29 to 31; See also p. 1154, §§ 201 to 216.)

3. Although the banking associations have been declared to be corporations, yet the laws relating to the details of the management of the old banks were never intended to apply to the new associations, and the courts have not yet held that the liabilities of directors under the old system is continued under the new. (Gillet v. Moody, 5 Barb., 185 , and 3 Comst., 479; Talmage v. Pell, 3 Seld., 328; Gillett v. Phillips, 3 Kern., 114; Curtis v. Leavitt, 15 N. Y. Rep., 1 , 247; opinion of Judge Comstock, 61, 76 to 83; opinion of Judge Shankland, 169 to 172; opinion of Judge Paige, 181 to 188.) 4. Other remedies for the protection of creditors are given with regard to banking associations. (Laws of 1849, chap. 226, p. 340.)

5. The Revised Statutes, in section 10, make the directors liable to the stockholders and creditors.

The act of 1849 declares that the claim of the creditors shall be enforced in the manner prescribed by that act, and in “no other manner.” A director must be a stockholder, and this remedy being given to the creditors in this case against the director in his capacity of stockholder, shows the judgment and

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intent of the legislature that the former statute was not in operation.

Gerardus Clark, for the plaintiffs (respondents).

1. The first ground of demurrer, viz.: “That several causes of action are improperly united,” cannot be sustained; 1st,' because by the 167th section of the Code, the complaint may unite several (and any number) of causes of action “ where they all arise from the same transaction, or transactions connected with the same subject of action."

2. If it shall be urged that the causes of action are not all separately stated, then, I answer that the defendant cannot avail himself of that objection under this form of demurrer. (10 How. Pr. R., 861.)

He should have applied to the Court to strike out. (1 Abbott, 516.)

II. The second objection, to wit, that the complaint “ does not upon its face state facts sufficient to constitute a cause of action," is equally untenable; even if this form of demurrer was at all admissible. It has been held that it was not. (10 How. Pr. R., 361, and the cases there cited.)

HI. This is a demurrer to the whole complaint, and, therefore, if any one of the counts or causes of action is good, the demurrer must be overruled. (1 Code R., N. S.; 347, 1 Barb. Ch. Pr., 107; Leland v. Tousey, 6 Hill, 328 ; 3 Duer, 653 ; Jaques v. Morris, 2 E. D. Smith’s R., 643, 644.)

TV". It was urged in the Court below, that the defendant was not liable to the plaintiff for breaches of the statute, because the latter was not a stockholder at the time of such violation. The answer to this is, that the liabilities of stockholders run with the stock, and, therefore, their rights must also. (1 R. S., 1161, 4th ed., sec. 232, part 1, ch. 18, tit. 2, art 7, sec. 4.)

By the Court.

—This is an appeal from an order at Special Term, overruling a demurrer interposed by the defendant to the complaint.

The demurrer is, first, for an alleged misjoinder of causes of action, and second, that the complaint does not state facts sufficient to constitute a cause of action.

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As to the misjoinder we are all of opinion that the demurrer is not well taken.

The causes of action all arise out of frauds alleged to have "been practised by the defendant, in relation to the stock of the bank, either by violation of his duty as director, in contravention of the various provisions of the statutes, or by false representations in respect to its value, by which the plaintiff was induced to become a purchaser of it. They may all be said to arise out of transactions connected with the same subject of action.

The case then stands on the general demurrer, and if there is a single good count in the complaint it must be overruled.

First. The cause of action stated in the first count, is an alleged falsehood uttered by the defendant as a director, with other directors, through the articles of association under which the bank was organized, as to the amount of the stock actually subscribed and paid in, whereby the plaintiff was induced to become a stockholder, and that by reason of the amount of stock so represented to have been subscribed and paid for, not having in fact been subscribed and paid for, to the extent so represented, the value of the shares of the capital stock was greatly diminished to plaintiff’s damage.

It is difficult to understand how a director can be chargeable individually for false statements contained in the articles of association of the bank, which necessarily preceded in order of time the election of the board of directors, or how such articles of association can have the character of a continuing false representation by every director who may subsequently come into the board, so as to give to every subsequent purchaser of the stock a right of action against him.

We are clear that no good cause of action is made out in this count.

Second. In respect to the second, third, fourth and fifth counts, they are but recapitulations of distinct violations, by the defendant as a director, of several of the provisions of the statute entitled “Of Moneyed Corporations.” (1 R. S., ch. 18, tit. 2.) Each of them forming an undoubted cause of action, under section 10 of the statute, in favor of every creditor and stockholder who may be injured thereby.

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The sixth count is a summing up or statement of the consequences of these several alleged violations of the statute, to wit, the insolvency and suspension of the bank, on the 9th day of December, 1854, whereby the plaintiff’s stock became worthless, and the defendant became liable to the plaintiff for the amount which he had paid for the stock, $2,000, and interest thereon.

These counts all allege the violations of the statute complained of to have been committed by the defendant before the 23d day of October, 1854. This was some five days before -the plaintiff became a stockholder himself, and the question arises whether he is entitled to the benefit of the provisions of section 10, giving this right of action.

We are of opinion that he is not, and that the statute was intended to apply only in favor of those who might be stockholders or creditors at the time of the several violations of its provisions complained of.

The right of action incident to a breach of duty on the part of a director, is one which attaches to the party who, in the language of the statute, “ sustains the lossand this is not predicable of a party who buys the depreciated stock after the offense committed. -The fact that the stock which he purchases is less valuable than it otherwise would have been, constitutes no loss to him, since he must be presumed, in the absence of any fraudulent inducement held out to him to purchase, to: have given only what the stock was worth at the time. If a man purchase a horse which has been injured in the hands of its owner, he certainly does not acquire by the purchase a right of-; action against the wrong-doer. Such -right belongs ■ to him who owned the horse when the wrong was committed, and does not pass with the horse to the purchaser. A man buys stock as he does every other kind of personal property, (under certain qualifications not necessary here to be stated,) at his own risk as to quality.

The statute (§ 10,) was intended to indemnify those who, holding stock intrinsically of value, suffer an actual loss by its depreciation in their hands by the fraudulent conduct of the directors, the trustees who are entrusted with the management of the business' and affairs of the association, and this is all it intends.

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We should hold this, had the stock in the present instance been purchased of a previous holder of it, who had a clear right of action against the directors personally, but in fact it was not so purchased, but the plaintiff purchased the shares from the bank itself. He gave par for it. Whether this stock was taken by becoming a subscriber, or by purchasing shares not previously issued, or which had been bought up by the bank, does not appear, but the purchase, whatever its form may have been, was from the bank itself, and not from an individual holder of the shares.

The bank in its corporate capacity could have no right of action under section 10, against its own directors.

Thus, the seventh count contains an allegation, that the defendant while a director did with other directors falsely and fraudulently represent to the plaintiff that the capital stock was actually worth par or over par, and thereby induced the plaintiff to become a stockholder, and that relying on such representations, he agreed to purchase and take, and on the 28th day of October did purchase and take from the bank 80 shares of its stock at par, paying therefor $2,000, whereas the stock at the time of the representation and purchase was worthless, and the banking association was soon afterwards declared insolvent, and the sum so paid by the plaintiff was wholly lost, whereby an action hath accrued to him against the defendant.

The offense here imputed is not one of those prohibited by the statute, and the count if sustained at all must be on the ground that it makes out a good cause of action against the defendant, in his individual capacity, for false representations.

We think it defective in this, that it does not allege that the defendant knew that the stock was not worth what he represented it to be, nor that he made the representation with the intent to induce the plaintiff to become a purchaser of it.

Alleging that a party “ falsely and fraudulently represented” a thing to be what it is not, is not an allegation of a knowledge on his part, or of an intent to deceive. Whether it was a fraud' or not depends on these two circumstances, and the averment that an act is fraudulent, is but an averment of a conclusion of fact, which standing by itself is wholly unsupported.

As director he is not chargeable with knowledge of the value

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cif the stock, and if he were, he is not responsible to any party to whom he misrepresents such value, unless the false statement were made with the intent to deceive him.

The intent is the essence of the fraud, and it is the question to be submitted to the jury. They might find that the defendant made the representation, but that he was himself deceived, and acted under an honest though mistaken apprehension of the truth.

To render him liable in damages to every person subsequently purchasing stock, to whom he has expressed an erroneous opinion of the value of the stock, or even have made an untrue statement in respect to it, but without an actual fraudulent intent, an intent to induce such purchase, on the ground that he was a director at the time, and should have known better, or should have held his peace, would be establishing a principle with which we are not acquainted and to which we cannot assent.

If the intent is to be proved, it should have been averred, and not being averred the count is bad even if knowledge may be presumed on the part of a director.

The allegation that the plaintiff was “ induced” by the representation to become a stockholder, does not supply the defect, and is entirely compatible with the absence of any fraudulent intent on the part of the defendant in making it.

Fourth. The eighth count alleges, that soon after the plaintiff became a stockholder, the banking association suspended payment, and in the succeeding January was declared insolvent, and that by the judgment of the Supreme Court the stockholders were adjudged to be liable for the payment of its debts, in proportion to the amount of their several shares, which were ratably assessed, and judgment rendered against them for the amounts so assessed, and that the amount assessed on the plaintiff’s stock was $977.08. “By reason of which said several acts of the defendant as hereinbefore mentioned, and violations of the statute aforesaid an action hath accrued,” &c., to the plaintiff against the defendant.

This is not an allegation of a cause of action arising out of the rendition of the judgment, the judgment being stated only as fixing the amount of the additional damages over and above the

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price paid for the stock to which the plaintiff conceives himself entitled.

No new cause of action is assigned, and the objections above stated to the first six counts are applicable to this. But if it were otherwise, and it was intended by this count to set up a cause of action, arising out of the rendition of the judgment, it would be bad in not averring that the administrators had paid it, or had assets of the estate in their hands which in the course of its due administration were applicable to its payment.

It is only actual damages which the statute (§10) was intended to indemnify against, and not such damage as a mere liability might entail.

We are all clearly of opinion, under the authorities cited by the learned Justice, at Special Term, that banking associations organized like the present are within the provisions of the statute relative to the insolvency of moneyed corporations, above cited, under the tenth section of which this action is brought.^[1]

We think the general demurrer well taken, and the judgment, at Special Term, must be reversed, with costs, and judgment be entered for defendant, without prejudice to an application, within twenty days, for leave to amend complaint, if plaintiff is so advised.

Ordered accordingly.

* See, Leavitt v. Blatchford, 17 N. Y. R, 521.