
    William Duryea, Respondent, v. Eugene Zimmerman and William C. Rogers, Appellants, Impleaded with M. Cochran Armour and Others, Defendants.
    Second Department,
    October 18, 1907.
    Fraud — purchase of stock induced by false prospectus i- knowledge of defendants -7- errotieo.us charge.
    In an action for deceit against, the promoters of a stock corporation to recover damages because of false' statements contained in a: .printed, prospectus of the company prepared by an, agent, it is error to refuse to charge that if the prospectus were prepared from information furnished to the defendants or their ' agent, the-jury must presume that their information -corresponded to the facts presented, in the prospectus, and though the information- were false, the defendants are not liable. This,-because .the burden is on the plaintiff to ■ establish that the defendants’, agent did not have and believe the information set forth in the-prospectus,. . ■
    Q-aYFor-and Jerks, JJ., dissented, with opinion.
    
      Appeal by the defendants, Eugene Zimmerman and another, from a judgment of the Supreme Court in- favor of the plaintiff, entered in the office of the clerk of the county of Rockland -on the 25th day of May, 1906, upon the verdict of a jury, and also from an order bearing date the 2-3d day of May, 1906, and entered in said clerk’s office, denying said defendants’ motion for a new trial made upon the minutes.
    
      Rush Taggart, for the appellant Zimmerman.
    
      Edward M. Shepard [Franklin Pierce with him on the brief], for the appellant Rogers.
    
      Robert B. Honeyman, for the respondent.
   Rich, J.:

In this action the plaintiff has recovered a judgment for damages which he claims he -has sustained in consequence of the deceitful representations of the defendant Zimmerman and of Rogers, Brown & Co. (of which firm defendant Rogers was a member), by wliieh he was induced to .purchase of them $48,000 in par value of the stock of the Alabama and Georgia-Iron Company, paying them therefor $20,000 in cash. Mo' personal deceit is charged against the appellants, who are the only defendants served or appearing in the action. It is conceded that neither of-thenl personálly made any false representations or knew of or shared in the printed prospectus upon the contents of which the plaintiff’s alleged cause of action is wholly based. Prior to the organization of the Alabama and Georgia Iron Company, Rogers, Brown & Co. and the defendant Zimmerman jointly bought the properties of two existing companies, the Cherokee Iron Company, a Georgia corporation owning an iron furnace and iron lands in and near Cqdartown, Ga., and the Augusta Mining Company, owning ore lands in Georgia and Alabama, after which the Alabama and Georgia Iron Company was organized upon a basis of $650,000 preferred stock and the same amount of common stock. Zimmerman and Rogers, Brown & Co. paid '$100,000 into its treasury and tz’ansferred to it the properties acqniz'ed from the Cherokee Iron Company and the Augusta Mining Company, receiving therefor.the stock of the new corporation and the $100,000 in its treasury. Ifewas testified upon the trial by Noah H. S wáyne, who had been an-officer of the corporation from the time of its organization, and. its president until a few weeks before, that the value of its properties then was not less than $1,500,000, and that it was making.between eight and ten per cent.upon the full amount of its preferred stock;. that it was a paying property and in a very prosperous condition. During the negotiations for the purchase of the two properties referred to, the purchasers, were .wholly represented by Archer Brown (a member of Rogers, Brown & Co.), who died on September 23, 1904. ' - . •

- After the organization of the new company.and conveyance of said .properties to it, .it was determined to sell some of its preferred and commop stock for the purpose of repaying some portion of the cost to the original purchasers who retained a large amount of its stock and had a substantial money investment -in the property. Archer Brown had the exclusive charge of all the details connected with the acquisition of-the property, the preparation of th¿ prospectus óf the new company and other'details of the salé of .its stock, with all of which matters neither of the defendants had any personal knowledge or conpection, Thereafter- Brown prepared, caused to be printed and circulated, a lengthy prospectus of the new company, setting forth in detail its- properties.; the expenditures that had been made upon them"; their estimated value and earnings and many other .matters, to which the names of “Rogers, Brown & Co.” and “Eugene Zimmerman” were signed'.

The plaintiff challenges tlié accuracy .or .truthfulness, of certain statements contained in the prospectus, which áre alleged to have been false and to have been made with the intent of inducing, the plaintiff to subscribe to the capital stock of said company, as follow's.:

First. That the Cherokee Company was a prosperous company which had paid dividends to the time-of the death of its president, Col. West, in 1898. (Upon the trial it appeared that Col. West died in 1892, instead of 1898.)
Second. That the actual" cash outlay upon the property of the Cherokee Iron Company was upwards of $800,000.
Third. That the actual cost of coke iron at the Cherokee furnace was about seven dollars per ton and of charcoal iron about nine dollars per ton. (The statement in the prospectus is: “The cost of coke iron at Cherokee furnace in normal times is about $7 per ton, and of charcoal iron about $9 per ton. On the rates of labor, transportation, etc., now ruling, the cost will be about one to two dollars per ton higher. * * * Allowing cost to be $11, the margin of profit is about $7 per ton.”) *
Fourth. That large contracts for charcoal iron had already been made at prices averaging about eighteen dollars and fifty cents per ton at the furnace..

It is disclosed by the evidence that the plaintiff had no direct dr personal relations with-any member of the firm of Eogers, Brown & Co., or with the defendant Zimmerman. Ilis transactions were solely with his brokers — Grant Brothers — who were represented in- the purchase of the stock by their employee, Van Sickle, who had all of his dealings with one Gilchrist, who was an employee of Eogers, Brown & Co., and authorized by them to sell some of the stock on commission. ■

The record presents several interesting questions, but as the case must be disposed of upon an error of the trial court in its-instruc-. tioiis to the jury, we.do not regard the consideration of the other questions presented profitable or of benefit to the litigants.

The learned trial justice, in his main charge, instructed the jury that before they could find a verdict for the plaintiff they must find that Brown must have known that'the statements contained in the prospectus were false, or not knowing whether they were false or true, and not caring what the fact might be, made them recklessly, paying no heed to the injuries which ensued, after which lie charged, as requested by defendants, that “ In all actions for deceit the presumption is in favor of innocence, and on .that account the intent or design to deceive the plaintiff must be affirmatively made out by evidence,” and refused to charge that, “ If, therefore, the jury find that this prospectus was prepared from information fur: nislied to the defendants or to Archer Brown, then the jury must presume that such information corresponded to the contents of the prospectus, and,. even though such' information was false, yet the defendants would not be liable therefor.” We think this sentence correctly states the law applicable to this case upon one of the ■crucial questions involved and that the refusal of the trial justice to instruct the jury as requested was error, requiring a reversal. There is .uncontradicted evidence in- the case that Brown did get information concerning these properties from several persons-prioi to théir purchase; these persons were not.called as witnesses,• and there is no proof that ' his statements contained iii the prospectus were -not in strict accordance with the information thus acquired. This stock was purchased by plaintiff'in 1899. 33rowh died September. 23; 1904, and it was not' until practically á year after his death that -this action was commenced. .If the information received by .Brown was in fact believed- by him, and honestly stated in the prospectus, no matter if such information and his representations based' thereon were in fact untrue; there was no deceit.and- the defendants were not liable'in this action, which-'is not-based upon negligence-or other fault or error of Brown,-but rests wholly upon-deceit practiced by him upon the plaintiff.

Actionable deceit cannot be practiced without an actual intention -to deceive, .resulting in actual deception and consequent loss. There is nothing contained in the prospectus which can properly' be- construed as -asserting that its statements were based upon- or true to the personal -knowledge of the person's malting them, which distinguishes this case" from the case of Hadcock v. Osmer (153 N. Y. 604), in -which the court pointed out that' the defendant assumed to have actual knowledge of the statement made, and intended that the lender-should understand him as communicatinghis aetual knowledge. The rule as stated in Constant v. University of Rochester (133 N. Y. 648) is that where -the natural inference from the evidence does not necessarily lead to-the presumption of a fraudulent intent, hut is equally as consistent with innocence'as wrongdoing, that construction must he placed upon it which will exonerate the party implicated from a dishonest intent. (See, also, Morris v. Talcott, 96 N. Y. 100, 104.) In Shultz v. Hoagland (85 N. Y. 464) it is said-: “It,is not enough that they (the facts) are ambiguous, and just as consistent with "innocence as with guilt. That would substitute suspicion as the equivalent of proof. They must not be, when-taken together- and aggregated, when interlinked and put in proper relation to each other," consistent with- an. honest intent. If they, are; the "proof of fraud" is wanting.” The-burden was on the plaintiff-tb establish that Brown did not have and believe information" according with the representations which lie set forth in the prospectus (Kountze v. Kennedy, 147 N. Y. 124, 129), and in the-absence of such evidence the defendants were entitled to the charge requested.

For this error the judgment and order must be reversed and a new trial gi’anted, costs to abide the event.

Hooker and Miller, JJ., concurred; the latter in a separate opinion; Gaynor, J., read for affirmance, with whom Jenks, J., concurred.

Miller, J.

(concurring):

It being established by the testimony of the plaintiff’s own witnesses, and not disputed, that the alleged fraudulent prospectus was prepared by Archer Brown from information furnished him ,by Edward F. Browning, it was incumbent upon the plaintiff to establish either that the prospectus did not correspond to the infoimation furnished, or that said Archer Brown knew that it was false. If there was no evidence to establish either of those propositions the court erred both in refusing the request to charge, discussed by Mr. Justice. ¡Rich, and in denying the motion for a non-suit. Said prospectus furnishes internal evidence that the facts stated by it .were not within the personal knowledge of the signers, and any one reading it would so understand. The plaintiff, who had the burden of establishing intention to deceive, and who brought his action after the death of the person charged with that intent, omitted to call said Browning as a witness, and, if the defendants can invoke the presumption of innocence, we must assume that the prospectus corresponded to the information furnished said Archer Brown. But I think a jury could say that a personal inspection of the properties of the Cherokee Company,would have disclosed that they had been idle for a long time, and a jury might infer that the pos* sessor of that knowledge would know that said company had not been prosperous. Whether the hearsay testimony of J. Hull Browning to the effect that said Brown inspected said properties was sufficient on this point, I do not now pass upon. In my opinion'the jury must have understood from the judge’s charge • that they could find intention to deceive from carelessness on said Brown’s part in making his investigations. ■ This point is presented-by, an exception, and if the charge wárrants that construction we must agree that an erroneous rule was charged, very prejudicial to the -defendants. But "whatever view of .the questions stated supra we may, take, we must agree, I think, that there is not sufficient competent evidence in this case upon which, a jury could base a verdict for damages. Of -the four alleged misrepresentations, enumerated in the opinion of Mr. Justice- High, there is’no pretense that there was any testimony, to show the falsity of the fourth, and I have searched the record in vain to .find any to. establish that of the second, .namely, “ that the actual cash’ outlay upon the property of the Cherokee Iron'Company "was upwards, of $-800,000.” ' This, of course, refers to- the expenditures made before the. acquisition of the'property by'the Alabama and Georgia Iron. Company, and the testimony of 'the only witness on the ".subject is" that in 1818 $350,000 had been expended on the property, and that from that time on very large expenditures were made in improving the property "by Col. West, the amount of which the.witness did not pretend to state: The third alleged" misrepresentation was contained in a paragraph headed “Estimated earnings,”, and. its statement of" the cost of" coke' and charcoal iron at the Cherokee, furnace was obviously, an estimate based on the cost of the different elements entering' into the production of coke or charcoal iron, namely, coke of charcoal^ limestone, ore and labor. There was no evidence whatever to show that this statement was not in accordance with the. information furnished Archer .'Brown, nor was" there any evidence of the. cost, at the ,time ^referred to in said prospectus, of the different elements'entering into said estimate. The only evidence upon this subject related" tó a time - prior to 1888 and, to one period after .said Alabama and Georgia Iron’ Company began to operate the property, hut there was no proof of the relative conditions. Assuming, however, that there \v.as. proof of the falsity of the representations respecting the cost of producing iron and the prosperity of the Cherokee Company, and of an intention to deceive in respect thereto, I am unable ’ to find in the evidence any basis for estimating the effect thereof bn the value of the stock: It is plain that the value of the ■ Cherokee Iron Company furnace was relatively small as compared to that of the extensive ore lands acquired by said Alabama and GeOTgia. Iron- Company, and it is not claimed that any misrepresentations were made respecting said lands. The court correctly charged the jury that- the measure of damages was the difference between the actual value of the stock at the time of its purchase and what its' value would have ' been if the alleged false statements had been true. There was no evidence to show the value of the- properties, except the undisputed testimony of a witness called by the plaintiff to the effect that they are now worth $1,500,000; if so, the stock which the plaintiff bought as a speculative venture at forty-one and three-fourths, is now worth more than par, which may account for the fact that ■he lias elected to hold to his bargain and claim damages. There was an attempt made to show market value, but as the stock was not traded in and concededly had no market value, such evidence must be disregarded, even though'we assume that it was properly admitted. Intrinsic, not market, value had to be shown, and the plaintiff made no attempt to show this. But if that had been shown,. I do not see hoW a jury could have told from this evidence how much more the-stock would have been worth had the representations .been true.' The' representation that the Cherokee Company was prosperous and had paid dividends to 1898 may or may not have been material upon the question under consideration. , If its failure to pay dividends was due to extravagant and poor management, as the testimony of the only witness called on the subject at least suggests,-it could have had little bearing o»n the actual worth of the properties; whereas, if it had been due to some inherent, difficulty in the opera-: tion of the properties themselves, the representation would have been material. But hów that -or the representation respecting the cost of producing iron at the Cherokee furnace affected the value of the stock was not shown, although the- question was susceptible of definite proof. The plaintiff cannot have his bargain and recover damages without proving any.

The judgment shquld be reversed.

Gaynor, J.

(dissenting):

It does not seem to me that the refusal to charge was error. It does not seem to me possible that it can be error, and I should be greatly surprised to find any authority even lending countenance to a claim that it is. '

The request was that if the jury find “that this prospectus was prepared from information furnished to the defendants or to Archer Brown, then the jury must presume that such information corresponded. to the contents of the prospectus, and, even though such information was false, yet the defendants would not be liable therefor.”

Is it so, that one who sells worthless stocks by a false prospectus, is exonerated of liability for deceit for false statements in such prospectus, by simply proving that some One,, any one, “ told him so”? Must a judge charge- that? It is.for those who make such requests to. make them technically accurate in order to get a good exception on their refusal. We are often told things by untrustworthy people, whom we should hot and do not believe; and reputable people tell us things which we should not always believe, and which, indeed, we know to be. untrue, or that they are not qualified to' speak of. Are we to send this cáse back for the next trial judge to charge this sweeping request?

Nor does it seem to me that refraining from saying in a circular that the statements therein are made on personal knowledge, requires a conclusion to he drawn that they are not, but the com trary. Any one who says a thing without' qualification makes it, prima facie, his own positive statement. -

Jenks, J., concurred.

Judgment and order reversed and new trial granted, costs to abide the event.  