
    Elias C. Benedict and Others, Respondents, v. Guardian Trust Company, Appellant.
    
      Fraudulent prospectus as to the earnings of a mining company — sales of stock induced thereby — measure of damages — assignment by several purchasers of stock to certain of their number by whom, suit is brought.
    
    Statements in a prospectus issued by á trust company, offering for sale the entire capital stock of a mining corporation capitalized at $50,000, that the corporation had been operated for two years at a large profit; that the net earnings, after deducting all royalties and expenses for the six months preceding the issuing of the prospectus, were $12,134.20, all of which was applicable to dividends; that it was the intention to pay- one or one and a half per cent \ dividends semi-monthly and extra dividends in addition thereto as often as should be deemed prudent, reserving at all times sufficient cash on hand to cover any contingency that might arise, amount to something more than a mere expression of an intention to pay dividends, and the falsity of such representations will furnish the basis for an action of fraud against the trust company by persons who purchase stock of the mining company in reliance thereon.
    The measure of damages recoverable in such an action is the difference between what would have been the value of the stock if the representations had been true and the actual value of such stock.
    Sections 73 and 77 of the Code of Civil Procedure do not operate to preclude parties who purchased stock in reliance upon false representations from assigning their claims to some of their number, for the purpose of enabling the latter to bring an action to recover the entire damages resulting from the fraud.
    Appeal by the defendant, the Guardian Trust Company, from a judgment of the Supreme Court in favor of the plaintiffs, entered in the office of the clerk of the county of New York on the 29th day of July, 1903, upon the report of a referee. .
    
      William M. Ivins, for the appellant.
    
      Edwin T. Rice, for the respondents.
   Hatch, J. :

This action seeks to recover damages against the defendant for claimed fraudulent representations whereby the plaintiffs and their assignors, fifteen in number, were induced to purchase shares of stock in the Chicago Zinc Mining Company (hereafter called the zinc company), a corporation organized under the laws of the State of Missouri. It appeared that on June 12,1899, F. B. Wilcox,, at that time the assistant treasurer of the defendant, secured a written option upon certain lead and zinc mines near Joplin, Ho., and upon certain mining and milling machinery and tools used in connection with said mines. In this option Wilcox agreed to pay $20,00.0 for the property, and accordingly on June seventeenth following, an agreement of purchase was entered into between Wilcox- and Messrs. Ralston, Stark and Stauffer. This agreement provided for the payment of the $20,000 as follows : $2,000 in cash and the balance in three equal payments at intervals of twenty days thereafter. The assignment of the lease and bill of sale of said property was delivered to the Joplin Bank and held in escrow, to be delivered to the vendee upon making final payment. On or about June 22, 1899, the zinc company was incorporated under the laws of the State of Missouri, with an authorized capital stock of $50,000, divided into 500 shares of the par value of $100 each. The articles of association were executed by A. E. Stillwell, J. McDowell Trimble, F. B. Wilcox, J. M. Mason and B. J. Hickman, who subscribed" for all the capital stock. All of these incorporators were officers or employees of the defendant, Stillwell being its president, Trimble.its vice-president, Wilcox its assistant treasurer, and Mason and Hickman clerks in its employ in its Kansas City office. The articles of association, so filed, stated that all of the capital stock had been subscribed for in good faith, and paid for in lawful money of the United States, and that it was then in the custody of the persons named in said articles as its directors. Upon the formation of the zinc company- the defendant received á certificate for 471-shares; Wilcox one. for 25 shares and 1 share each was issued to: each of the other stockholders. The consideration for the issuance of the sto'clc of the zinc company was an assignment executed by Wilcox and dated August 23,1899, whereby for an expressed consideration of $20,000 be transferred -to the zinc company all the rights which he had acquired from Stauffer, Stark and Ralston.- No cash was paid by the subscribing incorporators upon their subscription to the stock of the zinc company, and none of the cash payments - were subsequently made that were required to be made by the agreement of June seventeenth, the same being advanced by the defendant, and the defendant also advanced from, time to time various amounts to keep the mine running. The documents were released from escrow by the Joplin Bank upon the completion of the final payment on or about August 14, 1899. In August, 1899, the defendant issued a prospectus offering for sale 500 shares of the stock of the zinc company. This prospectus was shown by the defendant’s agents to the plaintiffs and to each of the plaintiffs’ assignors. It set forth among other things that the zinc company owned a ten-year lease on ten mining lots near Joplin; that it had been operated for two years at a large profit; that the net earnings after deducting all royalties and operating expenses for the period from January 1,' 1899, to June 30, 1899, were $12,134.20, every dollar of which was applicable to dividends, as all expense was charged directly to the expense account; that it was the intention to pay one, or one and one-half, per cent dividends semi-monthly, and extra dividends in addition thereto as often as should be deemed prudent, reserving at all times sufficient cash on hand to cover any contingency that might arise; that the affairs of the company were in the hands of experienced mining men; that all bills were settled weekly and that the company had no debts or obligations of any description. On the faith of such representations, plaintiffs and their assignors purchased 310 shares of stock of the zinc company from the defendant.' These purchases were all made between August 10 and October 1, 1899, and payment was made therefor to the defendant at par, except in one instance where a discount of two and one-half- per cent was allowed. Dividends were paid at the' rate of one per cent upon August fifteenth and thirty-first, September fifteenth and thirtieth; but no dividends, were paid thereafter. Between the tenth day of August and the day when the last dividend was paid, all the stock of the defendant was sold except eighteen shares. At the time the prospectus was issued, there were outstanding debts and obligations of the zinc company of $1,304.55. On August fifteenth, when the first dividend was paid, there were debts, of $1,804.55; on August thirty-first, when the second dividend was paid, there were debts amounting to $2,318.55; when the third dividend was paid there were debts of $3,196.55, and when the last dividend was paid there were debts to the amount of $4,862.75. A large portion of these debts Were due to the defendant. Upon each, of the aforesaid dividend days the defendant loaned to the zinc company $500 for the express purpose of enabling those dividends to be -made. By the terms of the leases, continuous operation was required to be kept up thereon. under penalty of forfeiture, as the lessors had a twenty per cent. royalty therein. The mine was operated fitfully until about the month of March, 1900, when the lease was forfeited on account of failure to work the same. At that time payment of claims amounting to $5,000 was being pressed against the company, and in June, 1900, its entire machinery and tools were sold upon execution for $1,000. The referee found that plaintiffs and each of their assignors purchased his stock relying upon the statements Contained in the prospectus, and that none of the purchasers made any examination into the affairs of the company; that the representations contained in the prospectus, as to debts, earnings and value, were false and fraudulent, and that the defendant knew that the same were false, fraudulent and untrue at the time they were made; that the said purchasers of stock suffered damage by reason of the defendant’s fraud and deceit, and that the respective claims thereto were assigned to the plaintiffs prior to the commencement of this action; that the amount of damage so suffered by the purchasers of the stock was the difference between what would have been its value had the representations contained in the prospectus been true and its actual value at the time of such sales; that .such damages amounted to the sum of $27,140 jvith interest thereon from October 1, 1899, together with costs, which interest and costs together with the damages above mentioned, make the amount entered in the judgment from which this appeal is taken.

The defendant is a foreign corporation organized under the laws of the State of Missouri. Upon a former appeal to this court from an interlocutory judgment overruling the defendant’s demurrer to the complaint in the action, it was decided that the complaint stated a good cause of action and that damages based upon fraud might be recovered against the defendant if the averments of the complaint were sustained by the proof upon a trial. It was also determined that the causes-of action in favor of the assignor -which were' assigned to the plaintiff were so assignable, and that the action was properly brought in the name of the assignee as plaintiff.. (Bene dict v. Guardian Trust Co., 58 App. Div. 302.) Upon the trial evidence was given tending to support the averments of the complaint, and inter alia it was made to appear that the representations contained in the prospectus as to cash on hand and earnings, from which to pay a dividend of one and one-half per cent on the first and fifteenth of each month and extra dividends in addition thereto, were false' to the knowledge of the defendant. It may be conceded that the mere expression of an intention to pay dividends would not furnish the basis for an actionable fraud, but this representation of intention to declare dividends was based upon the 'further statement of the prospectus of the amount of t.he earnings of the zinc company, which were set forth therein for a period of six months, and that “ every dollar of this amount was applicable to dividends, as all expense for developing drifts, sinking shafts, new machinery or any other improvements is charged directly to expense account.” This representation, therefore, amounted to something more than the mere expression of an intention. It was preceded with the statement of actual earnings and therefrom was deduced the fact that payment of dividends in this amount could be made and would be justified. Such representations were false, as is abundantly established by the proof; as were also the representations therein respecting the debts, earnings and value of ' the property in respect to which the prospectus made affirmative representations, which representations the referee found to be false and fraudulent and to have been knowingly made by the defendant when it solicited subscriptions for the stock; consequently every element upon which to found a judgment based upon fraud was established within the case relied upon by the defendant: Kountze v. Kennedy, 147 N. Y. 124.) It would be a work of supererogation to set out in detail the items of evidence contained in this voluminous record in support of such conclusion. It is sufficient now to state that the evidence is abundant upon which to support this view, and, after careful examination of the same we arrive at this result without hesitation.

It is claimed, however, that the referee adopted an erroneous rule of damage, which calls for a reversal of this judgment. The referee in his conclusion of law stated the rule to be the difference between what would have been the value of the stock of the zinc company had the representations been true and the actual value of the stock-at the time of .the respective sales and measured the damage sustained based thereon. The purchasers of the stock were entitled to the full benefits of their bargain. They relied upon the representations and based upon such representations the stock is to be valued. Had the representations been true they would have received such value. To that they were entitled. When this condition was shown to be false, the value of the stock came to rest upon the actual facts, and this condition seems to have shrunk the stock from the valué which the representations attached to it ninety per cent. The difference, therefore, between these two values represented the damage which the purchasers sustained. The referee adopted such rule and awarded judgment for such difference. His conclusion in this respect is supported by an abundance of authority. (Krumm v. Beach, 96 N. Y. 398; Whitney v. Allaire, 1 id. 305; Vail v. Reynolds, 118 id. 297; Hubbell v. Meigs, 50 id. 480.)

Further claim is made that the assignment and the bringing of the action thereon were prohibited by sections 73 and 77 of the Code of Civil Procedure. That the defendant was guilty of fraudulent misconduct is too plain to admit of dispute. That the plaintiffs by such act -have been defrauded of their money is a necessary consequence, and it would be a very singular thing if the statute, aimed to prevent oppression and fraud, could be invoked as a defense and used as a shield to protect successful fraud. The law has never been so unreasonable. The defrauded parties made joint investigation through a committee appointed for that purpose. When restitution was demanded of the defendant it made absolute refusal, and thereupon, for .the purpose of redressing the wrong with the least possible complication, the several rights of action were consolidated in the plaintiffs, who constituted the committee, and the action brought in a forum where redress for the wrong could be had in a single action. We think this course was commendable, and that it was better to treat this question and dispose of it in one action rather than to multiply it by eighteen. No law interposes to prevent such a proceeding; on the contrary, it supports it.. (Moses v. McDivitt, 88 N. Y. 62; Van Dewater v. Gear, 21 App. Div. 201; Tilden v. Aitkin, 37 id. 28.) consider them. We have examined all of the questions urged upon our attention and presented by the record, and find no reversible • error therein.

, The judgment should, therefore, be affirmed, with costs.

Van Brunt, P. J., Patterson, Ingraham and Laughlin, JJ., concurred.

Judgment affirmed, with costs.  