Kountze v. Kennedy

• Decision Date: 08 October 1895
• Citation: 41 N.E. 414,147 N.Y. 124
• Parties: KOUNTZE et al. v. KENNEDY.
• Court: New York Court of Appeals Court of Appeals

147 N.Y. 124

41 N.E. 414

KOUNTZE et al.

v.KENNEDY.

Court of Appeals of New York.

Oct. 8, 1895.

Appeal from supreme court, general term, First department.

Action by Luther Kountze and others against Edward S. T. Kennedy, executor of the will of John P. Kennedy, deceased, for deceit in the sale of corporate bonds. From a judgment of the general term (25 N. Y. Supp. 682) affirming a judgment dismissing the complaint, entered on the report of a referee, plaintiffs appeal. Affirmed.

Wheeler H. Peckham and George W. Van Slyck, for appellants.

William R. Bronk, for respondent.

ANDREWS, C. J.

The plaintiffs on this appeal are met by the serious difficulty that the finding of the referee, affirmed by the general term, exonerated the defendant's testator from the charge of fraud in making the representations upon which the plaintiffs relied in purchasing the bonds and stock of the Howe Machine Company. If this finding has support in the evidence it ends all controversy upon the merits here, because, although it was found that the statement of the liabilities of the company presented by Kennedy to the plaintiffs, upon the faith of which the purchase was made, was grossly inaccurate, and largely understated the actual liabilities of the company, nevertheless, if Kennedy believed the statement to be a true exhibit of the affairs of the company and was guilty of no dishonesty, the action must fail. The principle stated by Croke, J., in 3 Bulst. 95, in respect to actions for damages for deceit, that ‘fraud without damage, or damage without fraud, gives no cause of action, but when these two concur an action lies,’ has ever since been recognized as the true rule governing the subject. The cases are numerous. The principle has been obscured by the use by judges of the phrase ‘legalfraud,’ which has sometimes been interpreted as meaning fraud by construction, and as indicating that something less than actual fraud may sustain an action for deceit. The gravamen of the action is actual fraud, and nothing less will sustain it. The representation upon which it is based must be shown not only to have been false and material, but that the defendant, when he made it, knew that it was false, or, not knowing whether it was true or false, and not caring what the fact might be, made it recklessly, paying no heed to the injury which might ensue. 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. The man who intentionally deceives another to his injury should be legally responsible for the consequences. But if, through inattention, want of judgment, reliance upon information which a wiser man might not credit, misconception of the facts or of his moral obligation to inquire, he makes a representation designed to influence the conduct of another, and upon which the other acts to his prejudice, yet, if the misrepresentation was honestly made, believing it to be true, whatever other liability he may incur he cannot be made liable in an action for deceit. The law affords remedies for the consequences of innocent misrepresentation. A contract induced thereby may, in many cases, be avoided, and the equitable powers of courts are frequently interposed for the rescission of contracts or transactions based upon mistake or innocent misrepresentation. While the common-law action of deceit furnishes a remedy for fraud which ought to be preserved, we think it should be kept within its ancient limits, and should not by construction be extended to embrace dealings which, however unfortunate they may have proved to one of the parties, were not induced by actual intentional fraud on the part of the other. We have referred to a representation made without knowing whether it was true or false, and where the party making it was indifferent whether it was true or false, as sufficient to sustain the action if the representation was in fact untrue. The making of a representation to influence the conduct of the person to whom it is made, carries with it an assurance, necessarily implied from the situation, of the belief of the party making it in the truth of the affirmation. As was said by Maule, J., in Evans v. Edmonds, 13 C. B. 777, ‘He takes upon himself to warrant his own belief of the truth of that he asserts, and a man who makes a representation which he neither knows nor cares whether it is true or not, can have no real belief in the truth of what he asserts, and is justly guilty of deception.’ So, also, it has been held that one who falsely asserts a material fact, susceptible of accurate knowledge, to be true of his own knowledge, and thereby induces another to act upon the fact represented to his prejudice commits a fraud which will sustain an action for deceit. This is not an exception to, but an application of, the principle that actual fraud must be shown to sustain such an action. The purpose of the party asserting his personal knowledge is to induce belief in the fact represented, and if he has no knowledge, and the fact is one upon which special knowledge can be predicated, the inference of fraudulent intent in the absence of explanation naturally results. We shall refer to the subject again when we come to consider one of the points made by the plaintiffs.

In the present case the plaintiffs invested more than $100,000 in the bonds and stock of the Howe Machine Company in April, 1884, and the company went into the hands of a receiver in the fall of 1885, and the plaintiffs practically lost their whole investment. They purchased upon the application of Kennedy, who was president of the corporation, and the...