Downey v. Finucane

• Decision Date: 12 April 1912
• Parties: DOWNEY v. FINUCANE et al.
• Court: New York Court of Appeals Court of Appeals

205 N.Y. 251

98 N.E. 391

DOWNEY

v.FINUCANE et al.

Court of Appeals of New York.

April 12, 1912.

Appeal from Supreme Court, Appellate Division, Fourth Department.

Action by Frank H. Downey against Thomas W. Finucane and others, impleaded. From a judgment of the Appellate Division (146 App. Div. 209,130 N. Y. Supp. 988) affirming a judgment for plaintiff, defendants appeal. Affirmed.Daniel J. Kenefick, for appellant Finucane.

John G. Milburn, for other appellants.

Alton B. Parker and Elbridge L. Adams, for respondent.

WILLARD BARTLETT, J.

This is a civil action to recover damages for fraud and deceit . There was a general verdict in favor of the plaintiff, and 20 special questions were submitted to the jury to answer.

A curious feature in the record is the form of the verdict as originally rendered. After announcing that the jury had agreed, the foreman said: ‘We find for the plaintiff in the sum of $1,212.93 and recommend the clemency of the court for Messrs. Eastman, Sibley, Strong and Watson.’

[1] It is suggested that the nature of the action had not been brought clearly within the comprehension of jurors who could agree upon such a verdict as this, and that they evidently supposed that they were sitting in a criminal tribunal. The Appellate Division might have granted a new trial on this ground; but the form of the verdict was corrected by direction of the trial judge, and it now presents no legal error cognizable in this court.

The basis of the action is the alleged falsity of a prospectus published to promote the sale of the securities of the United States Independent Telephone Company. This prospectus was not prepared or signed by any of the appellants. The sole signature to the prospectus is that of Albert O. Fenn, care Alliance Bank, Rochester, N. Y. The plaintiff's right to recover, therefore, rests upon the agency of Fenn to act in their behalf in endeavoring to procure subscriptions by means of the prospectus. The United States independent Telephone Company was a holding corporation organized to acquire the control of several corporations through whose powers, rights, and franchises an independent telephone business might be established in New York and other parts of the country. At the time of the publication of the prospectus it had obtained a majority of the authorized capital stock of two other corporations: First, the New York Independent Telephone Company; and, second, the Stromberg-Carlson Telephone Manufacturing Company. The New York Independent Telephone Company had acquired an alleged franchise originally granted to the Mercantile Electric Company which was supposed to authorize the introduction, construction, and operation of an independent telephone system in the streets of the city of New York; and this alleged franchise plays the most prominent part in the present litigation. The Stromberg-Carlson Telephone Manufacturing Company was a corporation engaged in the manufacture of telephone instruments and appliances in the city of Rochester.

The defendant Finucane was largely interested in the latter company, and in 1904 he and the defendant John Satterlee (now deceased) appear to have formed a scheme to Company with a number of telephone operating Company with a number of telephone operatiing companies for the purpose of establishing an independent system to compete with the so-called Bell companies, particularly in the city of New York. With the assistance of Mr . William H. Page of New York, a lawyer, a syndicate agreement was prepared to carry this design into effect. The plaintiff was not able to procure this agreement or a copy of it to introduce into evidence upon the trial. The original appears to have been kept by Mr. Page who was not a witness. It was clearly proved, however, that the appellants became parties to this agreement, and that most, if not all, of them actually signed it. Sibley admits subscribing $50,000 to the syndicate. Strong admits that he subscribed $25,000 through Fenn. Eastman admits subscribing $25,000, although he remembers no paper, and Watson admits subscribing $50,000. Further proof justified the inference that the defendants Sibley, Strong, Eastman, and Watson entered into this undertaking for the establishment of an independent telephone system for purposes of individual profit irrespective of any relation they might assume as directors of such corporation or corporations as might be contemplated by Mr. Finucane and Mr. Page as necessary or appropriate agencies in carrying out the scheme, these two gentlemen and Fenn, the common agent, being largely trusted to devise and carry out the details of the enterprise. Messrs. Sibley, Strong, Eastman, and Watson, as their own testimony indicated, were quite indifferent as to the methods to be pursued. They confided in the others and contributed their money liberally, apparently convinced that the investment would yield large returns.

If Fenn was the agent of these defendants as members of such syndicate, his acts in furtherance of the enterprise and all that he did in reference to the prospectus must be deemed binding upon them.

[2] The promoter of a company, whether he be a director or not, who knowingly issues or sanctions the circulation of a false prospectus containing untrue statements of material facts naturally tending to mislead and to induce the public to purchase its stock or other securities, is unquestionably responsible to those who are injured thereby. Morgan v. Skiddy, 62 N. Y. 319.

[3] Where there are a number of such promoters, all the coadventurers are liable in damages for the fraud of an agent employed by them to effect the sale of the corporate securities without reference to their own moral guilt or innocence. Hornblower v. Crandall, 7 Mo. App. 220, affirmed 78 Mo. 581. In the case cited it was said that, where an associate in such an enterprise abstains from knowing and leaves the details to his companions while the illicit gains go to the common accounts, his ignorance ought not to avail him. ‘The law would be helpless if its obligations could be avoided by this convenient ignorance. Where the parties sought to be charged might have known, and where it can fairly be inferred that they with the wrongdoers received the benefit of the contrivance, their ignorance cannot avail them.’

The appellants, however, contend that Fenn, instead of acting for the individual members of the syndicate, was solely the agent of the United States Independent Telephone Company, and, this being so, that they cannot be held liable for his fraudulent misrepresentations, inasmuch as they were merely directors of that corporation. They invoke the doctrine that the mere fact of being a director is not per se sufficient to render a party liable for the fraud and misrepresentation of the active managers of a corporation or the fraudulent representations of an agent employed to market its stock. Arthur v. Griswold, 55 N. Y. 400. This contention is the foundation of the first legal proposition argued in their behalf, namely, that it was error to refuse to charge the jury that ‘if Mr. Fenn was selling bonds for the United States Independent Telephone Company, and not for the syndicate, then he was not the agent of the individual directors of the company, and they in that relation only would be liable for personal misconduct.’ The answer to this proposition is that the rule thus limiting the liability of directors of a corporation to cases where they are chargeable with some personal knowledge of the act claimed to be fraudulent has no application here because the evidence did not permit an inference that Fenn in issuing the prospectus was the agent of the United States Independent Telephone Company, rather than the agent of the appellants as members of the syndicate. Upon all the proof in the case as it stood at the end of the trial, the jury would not have been justified in making the desired distinction between the acts of the appellants as directors of that company and their acts as individuals. As has already been suggested, their own testimony showed that they were promoters—and that whatever functions they assumed, whether as directors or otherwise, were in furtherance of a common enterprise to market the securities of such corporations as might be formed to introduce and operate an independent telephone system in New York.

The appellants complain of four alleged errors in submitting to the jury questions as to the truth or falsity of statements contained in the prospectus:

[4][5] (1) It is contended that it was error to leave to the jury any question respecting the statements of the prospectus relating to the New York Independent Telephone Company. This was one of the corporations in which the United States Independent Telephone Company had acquired a majority of the stock, and it was the franchise of this corporation which was held out as the basis of the entire independent telephone scheme . ‘This company,’ said the prospectus, ‘is incorporated under the laws of the state of New York with an authorized capital of $50,000,000. It owns a franchise in the city of New York acquired under the advice of eminent counsel, under which it is its purpose to begin as soon as practicable and in the near future the construction of an independent telephone system in that city.’ This so-called...