Argued June 2, 1876
Decided September 19, 1876
M.M. Waters for the appellants.
Geo. N. Kennedy for the respondent.
The objection was taken on the trial, that the plaintiff could not maintain the action, for the reason that he did not return or offer to return to the defendants the certificates of stock in the "Union Patent Right Company," issued to him on his subscription to the capital stock, within a reasonable time after the discovery of the alleged fraud.
The validity of this objection depends on the character of the action. The complaint contains all the allegations essential in an action for deceit in inducing the plaintiff by fraudulent representations to purchase a worthless stock. The scienter was sufficiently averred. ( 25 N.Y., 244.) The summons was for relief and judgment was demanded for the damages sustained by the plaintiff. The action was ex delicto and not upon contract. The form of the summons and the demand for relief in connection with the allegations of the fraud characterize it. If the action had been brought upon the promise which the law implies against a fraudulent vendor of real or personal property to restore the consideration paid by the vendee upon his electing to rescind the contract, then the plaintiff would have been bound to aver and prove that upon discovery of the fraud he had returned or offered to return what he had received upon it. But an action for damages for the deceit is brought consistently with an affirmance of the contract of sale, and the judge properly held on the trial, that the averment in the complaint of an offer to return the certificate might be disregarded as surplusage. ( Hubbell v. Meigs, 50 N.Y., 487.)
The answer of the defendant Barber contains a counter-claim, arising out of an alleged contract between the plaintiff and Barber, made subsequent to the sale of the stock. The copy of the pleadings furnished to the court by the plaintiff contained a reply denying the alleged counter-claim. The defendant Barber thereupon offered to prove that in fact no reply had been served, as was claimed by the plaintiff. The judge refused to hear the proof and ruled that the case should proceed upon the pleadings furnished, leaving the defendant to his remedy by motion after the trial. This was the former practice in respect to the nisi prius record ( Wood v. Buckley, 13 J.R., 486), and it was, we think, within the discretion of the judge to refuse to enter into this collateral issue at that stage of the proceedings. Moreover, the facts upon which the alleged counter-claim arose were shown upon the trial, and they were insufficient to establish a counter-claim in the action.
In order to understand the force of objections taken on the trial by the defendants to the admission of evidence, it is proper to refer to the general features of the case as disclosed by the testimony. The "Union Patent Right Company" was a corporation organized under the general law for the formation of manufacturing and other corporations, passed February 17, 1848. The certificate was dated December 23, 1865, and was filed in the office of the secretary of State, January 13, 1866. The object of the corporation stated in the certificate, was the dealing in patent rights and the manufacture and sale of patented articles. The capital stock was fixed at $35,000, divided into shares of $500, each. The defendants and five other persons were named as trustees for the first year. The defendants Barber and Schermerhorn were elected respectively president and secretary of the company, and the salary of the former was fixed at $500 a month. Both of the defendants took an active part in the organization of the company, and the office of the defendant Schermerhorn was also for a considerable time the office of the company. The promoters of the company shortly before it was organized, had purchased for the sum of $8,500, an interest in a patent "hay-loader," and had given their notes for the principal part of the purchase-money. These notes were outstanding, and the scheme was set on foot to organize a corporation on the basis of this property, and by sales of stock to realize the means for the payment of their liabilities and to secure themselves for their advances. The interest in the patent was conveyed by the owners to the company soon after its organization, and was the only property which the company had to represent its nominal capital of $35,000. Both defendants were interested in the original purchase of the patent and both were to be benefited by sales of stock. In order to promote the sale of stock various individuals of prominence in the community were solicited to subscribe for stock and give their notes for the amount of their subscriptions so as to give credit to the enterprise, upon the secret agreement, however, that the notes should be given up after a short time without payment. In several instances subscriptions were made and notes were given upon this understanding, which were subsequently surrendered in pursuance of it to the makers. These subscribers neither received the stock or paid their subscriptions. The plaintiff subscribed for one share of the stock and gave his note for the full par or nominal value of the share. But he was not one of the persons with whom the agreement referred to was made. His note was payable to the defendants or to one of them, and was transferred before maturity in part payment of notes given by the defendants and others to the patentee on the original purchase, and he was subsequently compelled to pay it. The negotiation with the plaintiff which resulted in his subscription to the stock was conducted by the defendant Barber in the back office of the defendant Schermerhorn, who at the time was in the front office and did not hear the conversation. The invention was represented by Barber to be of great value. He mentioned the names of the persons who had taken stock in the company, and these were persons who had allowed their names to be used and had given their notes to aid the enterprise, but who never took, and were never expected to take, stock in the company. Stock was sold to other parties under similar circumstances, and upon similar representations. Enough was realized from the sales to pay the advances and liabilities of the original purchasers of the patent. Some effort was made to introduce and sell the right to use the invention, but after a short time they were discontinued. No dividends were ever earned or paid by the company and there was evidence tending to show that the invention was of no value.
It cannot be doubtful that an action lies for the fraud practiced upon the plaintiff. The representation of the value of the invention was connected with a false representation of an extrinsic fact calculated to impose upon the plaintiff, to put him off his guard and to induce him to give credit to the representation of value. It had the effect it was designed to have. He relied in taking the stock in part upon the supposed judgment of other persons who, as he was falsely informed, had taken stock in the company.
It is earnestly insisted in behalf of the defendant Schermerhorn that the evidence is insufficient to connect him with the fraud. It is true that he made no direct representations to the plaintiff. But the evidence warrants the conclusion that he knew from its inception of the scheme for securing fictitious subscriptions in aid of the sale of the stock and that he accepted the benefits resulting from the fraud.
The judge permitted the declarations made by the defendant Barber during his negotiation with the plaintiff for the sale of the stock to be given in evidence as against the defendant Schermerhorn before his connection with the company had been shown. The evidence was competent as against Barber. It became competent as against Schermerhorn, when by the facts subsequently proven his connection with the fraud was prima facie shown. The declarations of Barber were not competent to show that Schermerhorn was a party to the fraud, nor were they admitted for that purpose. But when evidence sufficient to submit to the jury had been given tending to show that the defendants were jointly engaged in a common scheme to defraud the plaintiff and others the acts and declarations of Barber in furtherance of the common design were admissible against both. The order of proof is in general a matter of discretion, and we are of opinion that no legal error was committed in allowing the declarations of Barber to be given in evidence, as against his co-defendant before proof of his connection with the conspiracy had been made. If the proof subsequently given had failed to connect Schermerhorn with the fraud, it would have been the duty of the court to have instructed the jury to disregard them in considering his liability. (1 Greenl. Ev., § 111; The People v. Parish, 4 Den., 153; Sweet v. Rodgers, 6 T.R., 118; Page v. Parker, 40 N.H., 62.)
The plaintiff was permitted to prove representations made by the defendants to other persons, at or near the same time, and of a similar character as those made to the plaintiff, and under similar circumstances. This was competent upon the question of fraudulent intent. ( Cary v. Houghtaling, 1 Hill, 311; Hall v. Naylor, 18 N.Y., 588.)
The court, in accordance with the request of the defendant, instructed the jury that the rule of damages was the difference between the value of the stock as it was represented to be and as it was in fact, and refused to charge that no recovery could be had because no proof of difference in value had been given. The value of the stock depended upon the value of the invention. The company had no other property. The jury were authorized to find that the invention was without value, and from this fact that the stock was valueless, also. The defendant represented that the invention was a valuable one; and as against the defendant, the jury could assume that if the representations had been true the stock would have been worth what the plaintiff paid for it. ( Page v. Parker, 40 N.H., 47.) The court properly refused to charge as requested.
The court having charged in substance that the jury must be satisfied from the evidence that the defendants were guilty of the fraud charged, before they could find a verdict against them, was then asked to charge that the jury must be satisfied by clear and substantial proof. The charge as made stated the correct rule of law upon the subject, and the court was not bound to charge in the words used by the defendants.
There are many exceptions to evidence, and to the charge, not here noticed; we have examined them, and are of opinion that none of them are well taken.
The judgment of the General Term should be affirmed.
All concur; MILLER, J., absent.