
    Herman Van Slochem, Respondent, v. Harold G. Villard, Appellant, Impleaded with William G. Conklin and Others, Defendants.
    (Appeal No. 1.)
    First Department,
    December 6, 1912.
    Corporations —■ sale of stock — false representations that stock is fully paid — liability of directors for fraud—pleading — complaint stating cause of action.
    A bona fide purchaser for value of stock issued as fully paid cannot beheld liable thereon either to the corporation, its creditors or to other persons, even though the stock was not actually paid up as represented.
    
      Where persons sell stock of a foreign corporation and the laws of the State in which it is organized provide that no stock shall issue except for money paid, labor done or property actually acquired by the corporation at the actual value thereof, and the seller represents to the purchaser that it is fully paid stock, he is entitled to rely upon the representation, it being a statement of an extrinsic fact and not a mere opinion as to value.
    Hence, where the complaint of such purchaser in substance alleges that the representations of the defendants, directors of the corporation, that the stock was fully paid and was of great value, were false in that it was issued for inadequate values, and that he relied upon said representations believing them to be true, the complaint, seeking to hold the directors for the fraud, is not subject to demurrer.
    Directors of corporations are now held strictly accountable for false statements made for the purpose of inducing the public to purchase stock at more than its real value.
    Dowling, J., dissented.
    Appeal by the defendant, Harold G-. Villard, from an order of the Supreme Court, made at the New York Special Term and entered in the office of the clerk of the county of New York on the 26th day of July, 1912, granting the plaintiff’s motion for judgment on the pleadings, consisting of the complaint and a demurrer thereto interposed by the said defendant Villard.
    
      Abram I. Elkus for the appellant.
    
      Henry L. Scheuerman, for the respondent.
   Scott, J.;

The plaintiff sues as assignee of one Van Gfelder, who bought from the British Columbia Railway and Development Company 8,000 shares of its capital stock (par value $25 each) for $80,000. The defendants are or were officers and directors of the company, s The complaint alleges that the company, a Delaware corporation, was organized with a share capital of-$12,000,000, divided into 480,000 shares at $25 each. It quotes the Constitution of Delaware to the effect that; “No corporation shall issue stock, except for money paid, labor done, or personal property or real estate, or leases thereof actually acquired by such corporation, and neither labor nor property shall be received in payment of stock at a greater price' than the actual value at the time the said labor was done, or property delivered or title acquired.”

It alleges that the company started business with a cash capital of $1,000, the proceeds of forty shares of stock sold at par. It then alleges that defendants entered into a conspiracy to rob the public, and in pursuance thereof issued all the remaining stock, to wit, $11,999,000, to defendant Wolkenstein for property or alleged property rights claimed to be owned by said Wolkenstein which the defendants, and each of them, well knew were not worth [said] sum * * * but which the defendants, and each of them, knew to be worthless or substantially worthless.” It is alleged that it was part of the conspiracy that said Wolkenstein should give to each of the other defendants 2,000 shares of the stock, and that the remainder or a portion thereof should be sold to the public for whatever price could be obtained as fully paid and non-assessable stock, whereas the defendants and each of them well knew that the stock was not full paid and was not non-assessable. It is reiterated that the stock was issued to Wolkenstein for property which defendants knew to be worthless or substantially worthless, and it is alleged that they adopted forms of certificates reciting on the face thereof that the stock was fully paid and non-assessable. It is alleged that a part of this stock was returned to the treasury of the company, and Wolkenstein was authorized to offer it for sale to the public. The final allegation is that defendants, acting through Wolkenstein, sold the 8,000 shares of stock to Van Gelder, and that in order to induce him to purchase they represented “ that the same had been fully paid and were non-assessable and of great value, whereas in truth and in fact, as the defendants well knew, the said shares had not been fully paid, were assessable and were worthless,” and that Van Gelder relied upon these representations and believed them to be true, and so relying and believing, purchased them.

So far as concerns the representation that the stock was non-assessable it may very well be that it was not, strictly speaking, false for it is alleged that the plaintiff acquired the stock for value and it is to be assumed that he was without notice of the facts he now alleges. The rule in such case seems to be that A bona fide purchaser for value and without notice of stock issued by a corporation as paid up cannot be held liable on such stock in any way either to the corporation, corporate creditors or other persons even though the stock was not actually paid up as represented.” (Cook Corp. [6th ed.] §50.)

A different question is presented as to the allegations that the stock “had been fully paid ” and was “ of great value.” If we take the allegations of the Complaint as true, as we must do on demurrer, the stock was far from being full paid because it had been issued to the extent of $11,999,000 for “ property or alleged property rights, but which the defendants and each of them knew to be worthless or substantially worthless. ” It is manifest that this does not constitute full payment. The statement respecting this corporation that the stock had been fully paid implied that it has been issued for money or labor done or property acquired by the corporation, and that neither the labor nor property had been received in payment of stock at a greater price than the actual value at the time the said labor was done, or property delivered or title acquired, for this is alleged to have been the requirement of the Constitution of the State of Delaware wherein the corporation was organized, and the purchaser was certainly entitled to rely upon the statement that the stock was fully paid as including a statement that it had been lawfully issued as full-paid stock. Manifestly, according to the allegations of the complaint, it had not been, and the statement that it had been so issued was false. Ordinarily the assertion by a vendor that the property sold is “valuable” or “of great value”• or “very valuable” will be considered as the expression of an opinion rather than as. the representation of a fact. In Simar v. Canaday (53 N. Y. 298) it was held that all statements by a vendor of the value of property sold are not mere matters of opinion; if he, knowing them to be untrue, makes them with the intention of misleading the vendee, and if the latter has not equal means of knowledge and is induced to forebear inquiries which he otherwise would have made, and relying.upon such statements is misled to his injury, he may avoid the contract or recover damages for the injury. (See note to Ellis v. Andrews, 56 N. Y. 83;) In Ellis v. Andrews the court said: “ Upon the question of value the purchaser must rely upon his own judgment, and it is his folly to rely upon the representation of the vendor in that respect; but, in regard to any extrinsic fact affecting the quality or value of the subject of the contract he may rely upon the assurances of the vendor, and if he does so rely, and the assurances are fraudulently made to induce him to make the contract, he may have an action for the injury sustained.” This statement of the law applies to the present case. The statement that the stock had been fully paid was a statement regarding an extrinsic fact and was made with a view to inducing the public, including plaintiff’s assignor, to purchase the stock. It was false; whether it was true or false must have had an important bearing on the value of the- stock, and the false statement in that regard cannot have failed to affect the vendee’s judgment of the value of the stock'which he bought. The disposition at the present day is to hold directors of corporations to a strict accountability for false statements made for the purpose of inducing the public to purchase stocks at much more than their real value. (See Ottinger v. Bennett, 144 App. Div. 525, 532; 203 N. Y. 554.) It is not our purpose to relax the rule in that respect. We are, therefore, of the opinion that the complaint sufficiently states a cause of action. The order appealed from will, therefore, be affirmed, with ten dollars costs and disbursements, with leave to the appellant to withdraw the demurrer and answer within twenty days upon payment of costs in this court and in the court below.

Ingraham, P. J., McLaughlin and Clarke, JJ., concurred; Dowling, J., dissented.

Order affirmed, with ten dollars costs and disbursements, with leave to appellant to withdraw demurrer and answer on payment of costs.  