Reno v. Bull

• Decision Date: 15 July 1919
• Parties: RENO v. BULL et al.
• Court: New York Court of Appeals Court of Appeals

226 N.Y. 546

124 N.E. 144

RENO

v.BULL et al. ^*

Court of Appeals of New York.

July 15, 1919.

Appeal from Supreme Court, Appellate Division, First Department.

Action by Jessie W. Reno against Frederick Bull and others. From judgment for plaintiff, defendants appealed to the Appellate Division, which unanimously affirmed (179 App. Div. 891,165 N. Y. Supp. 1109), and defendants appeal by permission. Judgments reversed, and new trial ordered.

George Zabriskie, of New York City, for appellants.

Everett V. Abbot, of New York City, for respondent.

McLAUGHLIN, J.

Action to recover damages for fraud and deceit, by reason of which it is claimed plaintiff was induced to purchase 50 shares, each of the par value of $100, of the capital stock of the American Oriental Company, a Maine corporation. Plaintiff had a verdict for $6,000, and from the judgment entered thereon defendants appealed to the Appellate Division, where the same was unanimously affirmed, and by permission they now appeal to this court.

[1] The unanimous affirmance of the judgment conclusively establishes that the findings of the jury are sustained by evidence. The judgment therefore must be affirmed, unless errors, presented by proper exceptions, were committed by the trial court which affect the substantial rights of the defendants.

After a careful consideration of the record, the briefs and argument of respective counsel, I have reached the conclusion that there are at least two errors of this character which are so fundamental that they necessitate the reversal of the judgment. They are instructions given to the jury as to the duty and obligations of the defendants and as to the measure of damages.

As to the duty and obligations of the defendants: At the time the stock was purchased, they were, with others, directors of the corporation. It had a plant, which cost several hundred thousand dollars, for refining crude oil, located on San Francisco Bay, in the state of California. The corporation was organized with a capital stock of $4,000,000, $2,000,000 common and $2,000,000 preferred, and $1,000,000 of the latter it was desirous of inducing the public to buy. To that end, it made an arrangement with Charles D. Barney & Co., prominent bankers in New York and Philadelphia, to offer the same for sale. Prior to the offering, Barney & Co. prepared a circular, or prospectus, signed by them, which consisted of a letter from one Ertz, the president of the corporation, addressed to Barney & Co., which contained statements as to the capacity of the plant, probable earnings of the corporation, crude oil supplied in the state of California, advantages in securing trade in the Orient, and large dividends that would be received by holders of the preferred stock. The circular also contained the names of the directors, the davisory committee, and other matters unnecessary to state. This circular was adopted and approved by the directors of the corporation. The statements contained in the circular, which the plaintiff claimed were, and which the jury have found to be, false, were: (a) That the plant was well built, fully completed, and had a capacity of refining 2,000 barrels of crude oil per day; (b) that there was an abundance of crude oil in the state of California; and (c) that there was a profitable Oriental market for the sale of the refined products. In connection with these alleged false statements, it was also claimed that the defendants were liable, by reason of a statement made by Ertz, the president of the corporation, to the plaintiff, at or immediately prior to the time he purchased the stock, to the effect that the corporation would begin business with $1,000,000 cash capital.

No evidence was offered at the trial, nor was the claim there made, or upon the argument before us, that the defendants or any of them had actual knowledge of the alleged false statements set forth in the circular or the statement made by the president, or that they had any connection with such statements other than as directors of the corporation, and all except one of them testified at the trial that they, at the time the circular was issued, believed the statements therein made to be true.

[2] The action, as indicated, was to recover for fraud and deceit, and to maintain it the plaintiff had to prove that the defendants, as directors, by adopting and authorizing Barney & Co. to issue the circular, made the representations alleged; that such representations were false; that they knew they were false; that they were made for the purpose of deceiving the public; and that he, believing the same to be true, made the purchase and was thereby damaged; in other words, the plaintiff had to prove, as this court has recently said, ‘Representation, falsity, scienter, deception, and injury.’ Ochs v. Woods, 221 N. Y. 335, 117 N. E. 305. This rule is so well settled in this state that the citation of authorities seems almost unnecessary. But see the following: Oberlander v. Spiess, 45 N. Y. 175;Meyer v. Amidon, 45 N. Y. 169;Wakeman v. Dalley, 51 N. Y. 27, 10 Am. Rep. 551;Arthur v. Griswold, 55 N. Y. 400;Salisbury v. Howe, 87 N. Y. 128;Brackett v. Griswold, 112 N. Y. 454, 20 N. E. 376;Kountze v. Kennedy, 147 N. Y. 124, 41 N. E. 414, 29 L. R. A. 360, 49 Am. St. Rep. 651; Urtz v. N. Y. C. & H. R. R. R. Co., 202 N. Y. 170, 95 N. E. 711; Ochs v. Woods, supra. This same rule prevails in other jurisdictions. Nash v. Minn. Title Ins. & Trust Co., 163 Mass. 574, 40 N. E. 1039,28 L. R. A. 753, 47 Am. St. rep. 489;Cahill v. Applegarth, 98 Md. 493, 56 Atl. 794;Boddy v. Henry, 113 Iowa, 462, 85 N. W. 771,53 L. R. A. 769;Kimber v. Young, 137 Fed. 744, 70 C. C. A. 178; Taylor v. Ashton 11 M. & W. 401; Derry v. Peek, L. R. 14 App. Cas. 337. The jury should have been so instructed. The trial court, however, in utter disregard of this rule, said to the jury that it was the duty of the defendants, when they, as directors of the corporation, approved of the circular, to know the truth of the facts stated therein and if they did not know whether such facts were true, they were bound to know if they had a reasonable opportunity to ascertain the same. He said:

‘It is their duty before they allow these representations to be made to the public * * * to know the facts * * * even though they believe the representations to be true; * * * if they had ample time to know * * * they are bound. * * * In other words, if although they did not know these facts and did not know them to be false, if they authorized the issuance of the prospectus, and authorized the statements to be made, then they are liable, * * * if in the exercise of ordinary care in the conduct of the business they would have been given means of knowing that they were false. * * * If they authorized a false statement to be made, when by common prudence and the exercise of ordinary care they could have discovered that these representations were false, then they are just as liable as if they had actual personal knowledge that they were false.’

When the instructions thus given are subjected to the rule above stated, it at once becomes apparent that the same were erroneous. Erroneous, because there was substituted as the test of defendants' liability negligence, instead of a purpose to deceive. Negligence and fraud are not synonymous terms; nor in legal effect are they equivalent terms. Fraud presupposes a willful purpose resorted to with intent to deprive another of his legal rights. It is positive in that the purpose concurs with the act, designedly and knowingly committed. Negligence, whatever be its grade, does not include a purpose to do a wrongful act. It may be some evidence of, but is not, fraud. Gardner v. Heartt, 3 Denio, 232. Fraud always has its origin in a purpose, but negligence is an omission of duty minus the purpose. People v. Camp, 66 Hun, 531, 21 N. Y. Supp. 741;Raming v. Metropolitan Street Ry. Co., 157 Mo. 477, 57 S. W. 268;Clevenland R. R. Co. v. Miller, 149 Ind. 490, 49 N. E. 445. This distinction was clearly pointed out in Kountze v. Kennedy, supra, 147 N. Y. 129, 41 N. E. 414, 29 L. R. A. 360, 49 Am. St. Rep. 651, the court saying:

‘Misjudgment, however gross, or want of caution, however marked, is not fraud. Intentional fraud, as distinguished from a mere breach of duty or the omission to use due care, is an essential factor in an action for deceit.’

But it is suggested by counsel for respondent that this distinction and the ‘ancient rule of scienter’ in actions for deceit has been changed by this court. Downey v. Finucane, 205 N. Y. 251, 98 N. E. 391,40 L. R. A. (N. S.) 307. In this he is mistaken. It was not the intention of this court in the Downey Case to overrule prior decisions of the court as to what was necessary to be established in order to recover for fraud and deceit. No such question was presented, considered, or passed upon. There, the defendants were held liable for the acts of one Fenn, not upon the ground that he was a codirector, but because defendants had made him their agent as the manager of a syndicate. This was pointed out in Rives v. Bartlett, 215 N. Y. 33, 109 N. E. 83.

In the instant case, the defendants, in approving the circular and authorizing Barney & Co., to offer the stock for sale, acted solely for the corporation. They were not members of a syndicate to promote the sale, nor were they nor any of them underwriters of the stock offered to the public. So far as they were concerned, the corporation alone was interested in the sale. Barney & Co. was its agent, and not the agent of the defendants. Arthur v. Griswold, supra; Rives v. Bartlett, supra.

[3] The rule as to the measure of...