Cross v. Sackett

The gist of the complaint is, that the defendants, by the means detailed, were “ fraudulently and illegally intending and contriving to dispose of the said property at a false and fictitious value, for their own benefit, as individuals, and to cause it to be generally believed, that the said company possessed capital, or had property to the amount of $1,000,000 in all,”

“ and that shares or interests in said capital were of great value, and a means of profitable traffic and of safe investment,”. . . . and that “ by means of the aforesaid false and fraudulent acts, practices, deceits, statements and representations of the said defendants, it had come to be generally believed in the City of New York, and was believed by the plaintiff, that the said Gold Hill Mining Company was, in fact, possessed of property of at least $1,000,000 in value, and that shares and interests in such capital were of the value of at least $5 per share, and that the said company had, since the organization thereof, earned over and above its expenses, at least, the sum of $50,000," etc.. . and so believing, and on the faith and credit of the aforesaid false and fraudulent acts, practices, and representations of the said defendants, of the falsity and fraud whereof the said plaintiff was ignorant, the said plaintiff did on the aforesaid 14th of April, 1854,” purchase certificates of said stock to the extent of 1000 shares, and paid $3500 therefor, and the interest acquired by the plaintiff was worthless. “ That by means of said false, fraudulent, and deceptive acts, practices, and representations of the said defendants, said plaintiff has sustained damage to the amount of $6000, for which sum, with the costs of this action, he demands judgment.”

It is an obvious principle, that a fraud practised by the defendants on the plaintiff and producing damage, will give to the plaintiff a right of action. This principle is not denied. But it is denied, that the allegations of fact, contained in the complaint, bring this case within its operation.

There is, in substance, no difference between an averment, that by means of certain specified frauds of the defendants, the plaintiff was induced to and did purchase, and an averment that the defendants, by means of the same frauds, induced the plaintiff to buy the same stock.

In Gerhard v. Bates, (20 Eng. Law and Eq. R. 136, S. C. 2 Ellis & Bl. 476,) the averment, by which it was held that the wrong and the. loss were concatenated as cause, and effect, was in these words, viz.: “that the defendants, by means of the said false, fraudulent, and deceitful representations, wrongfully and fraudulently induced the plaintiff to become the purchaser and bearer of 2500 of the said 12,000 shares, at 12s. 6d. a share, etc.”

It was not, in terms, alleged, that the defendant made any of the fraudulent representations to the plaintiff, directly, or had any communication with him, in respect to such purchase, before it was made.

We think, that an allegation that, “by means of the said false, fraudulent, and deceitful representations of the said defendants, the plaintiff was wrongfully and fraudulently induced to become the purchaser and bearer of 2500 of the said 12,000 shares, at 12s. 6d. a share, etc.,” would not mean less, or be less effective on a general demurrer to a complaint or declaration, than an allegation in the form of that contained in the declaration in Gerhard v. Bates.

The complaint before us is, that the defendants practised certain frauds to induce the public generally to believe certain things, that by means of these frauds of the defendants, the public generally, and -the plaintiff in particular, did believe these things; and that so believing and relying on these things being as the defendants had fraudulently represented, and because they had represented them to be so, the plaintiff bought, and that by

This, as it seems to us, is saying that the defendants, by the frauds enumerated, have fraudulently induced the plaintiff to purchase stock, and that by such fraud they have subjected him to damage.

The complaint details the artifices employed to deceive, and connects the fraud of the defendants and the damage to the plaintiff, as cause and effect.

Although the Code does not give a right of action upon any given state of facts which would not create one before it was enacted, still no artificial or technical phraseology need be employed in stating the facts claimed to constitute a cause of action. There are now no rules by which the sufficiency of a pleading is to be determined, except those presented by the Code itself, § 140. A complaint, to be sufficient, must contain a concise statement of facts, constituting a cause of action, § 142. Whether those stated constitute one, is to be determined by applying to them established principles of law. In construing a pleading, for the purpose of determining its effect, its allegations must be liberally, and not technically, construed, and must be construed with a view to substantial justice between the parties, § 159.

The publicly advertised fact, repeated from time to time, that' the shareholders were entitled to dividends of money out of the profits of the said company’s business, and some other acts enumerated in the complaint, as having been done by the defendants, were continuing representations to the public, and amounted to representations to any and every person, who might be thereby induced to purchase shares, if so advertised with intent to deceive and defraud the public generally.

When a bubble company is formed with the fraudulent intent of its managers, to induce a general belief that its stock is of, at least, its par value, and that, in prosecuting the business for which it was professedly organized, it is making money, and so much money as to enable the shareholders to declare successive dividends out of the profits every two months, and this fraud is prac tised to give to the stock a market value, and to induce the public generally to seek it and purchase it as an investment—and the fraud is successful, and produces the results contemplated and in

In the case last supposed, there can be no doubt of the liability of the person fraudulently recommending the one who obtained credit.

It is urged, that the Squib case, Scott v. Shepherd, (2 Wm. Bl. 892,) and the case of the loaded gun placed in the hands of a young and inexperienced girl, (Dixon v. Bell, 5 M. and S. 198,) and the case of labelling poisonous drugs with the name of a harmless medicine, (Thomas v. Winchester, 2 Seld. 411,) and some others, cited on the argument, are exemplifications of the rule, that liability attaches to him who, having the control of a destructive physical agent, either mischievously or by neglect, places or leaves it in such a condition, that, in the usual and natural course of things, its action may work an injury to others, and injury, in fact, ensues to their persons or property. In those cases, it is true, the physical agent acted directly upon the person or property of another, and produced inj ury. But, in giving existence to the immediate action which caused the injury, the person, held liable, did not participate. All he did was complete, before such immediate action commenced; and in some of the cases, an interval occurred after his direct action, and its effects were at an end, before the action of others, which directly produced the injury, was commenced.

In the present case, although there is no physical agent which has directly inj ured the plaintiff by its action, yet the means, charged to have been employed by the defendants to defraud, are alleged to have been designed to be, and were, as it is averred, continually exerting an influence upon those whom they were intended

The defendants, according to the allegations of the complaint, employed these frauds to produce this result—a result anticipated, according to the usuál and natural course of things, if the frauds should not be detected before their natural and intended effects had been realized.

Some of the alleged acts of fraud are stated to have been performed before the company was organized, and, as to two of the defendants, it is not charged that they originally participated in them; but it is averred, that all the defendants, after all of them co-operated in the frauds stated to have been subsequently practiced, did so “ well knowing the premisesand, of course, continued the use of the means previously perfected, as part of the scheme to deceive, with a knowledge of their fraudulent character, and with a view to defraud the public generally.

We admit that it cannot be law, that a person who deceives A by some instrument, and by it intends to deceive only him, can be made liable to every person who is injured from dealing with A, by being misled by the instrument which deceived A, and was made to deceive him alone.

But, when an instrument is made to deceive the public generally, and is adapted, as well as intended, to deceive some portion of the public, and as well one person as another, and is used as it was designed it should be, and fraudulently induces some one to act to his prejudice, by acting in the mode it was intended to influence them to act who might be deceived by it; the person who made the instrument, and caused it to be thus fraudulently used, is liable to the person who has been defrauded by it. In such a case, the person injured has been-subjected to damage by his fraudulent acts, and the fraudulent wrong-doer is liable for the consequences.

We concede that, in order to make the defendants liable to the plaintiffs, enough must be stated in the complaint to show that the defendants caused the damage to the plaintiff of which he complains. If enough is not stated to amount, in substance, to that, the complaint does not contain facts sufficient to constitute a cause of action. But, in the view which we take of the allegations

What evidence the plaintiff must give to establish the case made by the complaint, on its material allegations being put at issue, is not a question before us.

We do not intend to intimate any opinion upon, that point, nor upon the effect, as evidence, of any of the documents set forth in the complaint, in support of such issues; but affirm the order appealed from, on the ground, that, assuming all the allegations stated in the complaint to be true, it is alleged, in substance, that the defendants have fraudulently induced the plaintiff to purchase 1000 shares of the stock in question to his damage; for the recovery of which damage, this action is brought.

I understand that all the Judges who heard the argument, concur with me in affirming the order, solely on this ground, except my brother Hoffman, who has considered some additional propositions, and has stated, in the elaborate opinion he has prepared, the conclusions at which he has arrived.

In Ward v. Sackett, et al., the order appealed from must be affirmed, on the same grounds as that in Gross v. Sackett, et al.

(The opinion, which is reported entire in Abb.

Pr. R. vol. 6, p. 259, after stating, summarily, the allegations of the complaint, reads as follows, viz.):—My first subject of inquiry shall be, What did the certificates, issued by the defendants in their corporate name, purport to represent? what, under the statute of organization, ought they by law to have represented l and what was the truth in relation to such representations ?

The representation on the certificate, with its attendant power, was, that the party named in it was entitled to an interest, proportionate to the whole stock, in a money capital, or in property equivalent substantially to a money capital, of one million of dollars. This is the statement made and uttered by the defendants with an implied engagement for its truth upon these instruments.

And this is precisely what, under their charter, they were allowed and directed to represent; and they could only comply with

Section 14 of the Act of 1848, (Laws of 1848, ’54, § 14) declared, that “ nothing but money should be considered as payment of any part of the capital stock.” The act of 1853, (Laws of 1853, 705,) provided “ that the trustees may purchase mines, manufactories, and other property necessary for their business, and issue stock to the amount of the value thereof in payment therefor, and the stock so issued shall be taken as full stock.” It is to be reported, not as cash paid into the company, but according to the fact.

We accede to the proposition of the counsel of the plaintiff, that the legislature, in substituting mines and other property for the money capital before prescribed, intended and declared, that such property should have an actual value reasonably proportionate to the stock issued to pay for it. Nothing else is consistent with the honest purposes of such an association, and nothing else can have been the legislative will.

But what did these certificates, in truth, represent? What, for example, was the fact, as the complaint states it, as to the certificate for 1000 shares, purchased by the plaintiff? Instead of an interest in $5000 of money once contributed and presumed to exist in some form of value, or in mines and property of an equal or substantially equal value, he got what he alleges to be wholly worthless, and which, upon any calculation upon the statements made, must be of greatly inferior value.

We are bound to assume the allegations of this complaint to be true, in all their reasonable and legal import; and if so, a case is presented of the formation of a bubble company, contrived for purposes of private emolument, its authors and managers fraudulently publishing statements tending to produce the belief that the stock was, at least, of its par value; that its business had warranted successive dividends from profits; that these false and deceptive representations were made by the defendants, the authors or managers of the scheme; that they were in such an apparent form of negotiability, as, from the custom of business, was peculiarly calculated to delude and to injure; and that a delusion and injury has actually been produced, and fallen upon the plaintiff, in consequence of such acts.

We may here observe, that some of the acts of fraud are stated

The learned counsel of the defendants has pressed upon us the proposition, that such a suit as this has been unknown through all periods of the law, except when it was warranted by the statute of Geo. I. (cap. 18, § 20,1719), consequent upon the South Séa Bubble. He insists “ that because the common law afforded no remedy to the remote purchaser, this statute was passed, giving in the 20th section an action for damages.”

He has called our attention to the history of those gigantic frauds, which have acquired an immortality of pre-eminence among the destructive projects of the visionary or the designing, the Mississippi and South Sea schemes. A member of Parliament, when the Act of Geo. I. was discussed, admitted “ that the directors could not be reached by any known law; but, he said, extraordinary crimes call for extraordinary remedies. The Roman lawgivers had not foreseen the possibility of a parricide; but as soon as the first monster appeared, they found a law. The sack and the Tiber was his doom.” (Lord Mahon’s History, vol. i. 280.)

But I cannot believe, that either the argument of the learned counsel, or the declamation of the rhetorician of the House of Commons, is sufficient to stamp the law of England with the impotency attributed to it. I consider that there have always been principles of law, and tribunals adapted and competent, to redress wrongs of this nature.

The Act of Geo. I. was annulled in the 6th year of Geo. IV. (1825.) The 19th, 20th, and 21st sections were recited and repealed, with this declaration: “ And whereas it is expedient that so much of the above act as is above set forth should be repealed, and that the said undertakings, attempts, practices, and acts should be adjudged and dealt with according to the common law, notwithstanding such act. Therefore, etc.”

We may assume that the Parliament thought there was some mode of dealing with such fraudulent practices as the 20th sec

In The Charitable Corporation v. Sutton, (2 Atk. 401, 1742,) Lord Hardwicke announced as an unquestionable principle, that a court of chancery could give relief against all who are constituted expressly, or by operation of law, trustees or agents, to parties injured by their acts. It is true, the corporation itself there sued the managers for a defalcation.

In the case of Hayes v. Morgan, (April, 1857,) I had occasion to consider the following authorities:—(Hitchens v. Congreve, 4 Russ. 562 ; Walburn v. Ingilby, 1 Mylne & K. 61; Foss v. Harbottle, 2 Hare, 461; Dodge v. Woolsey, 18 How. H. S. R. 33; Benson v. Heathcum, 1 Y. & Coll. Ch. Cas. 326; and Robinson v. Smith, 3 Paige, 222.)

The law which may be gathered from these cases is, that there is no wrong or fraud, which directors of a joint-stock company, incorporated or otherwise, can commit, which cannot be redressed by appropriate and adequate remedies. The first mode is, when the company, in its corporate name, seeks to set aside the fraud, to reclaim abstracted property, or prevent a corporate loss. Such was the case of the Corporation v. Sutton, and the rule in Foss v. Harbotlle. The next mode is, when shareholders bring an action for the same object, unitedly,, or in the form which the Court of Chancery permits, of a bill by one or more on behalf of themselves and all others, having a common interest. This right exists under various circumstances. It clearly exists when the directors or agents, whose deeds or omissions are impeached, do themselves control the company, and impede the assertion of a right in its own name. (Mozley v. Alston, 1 Phill. Ch. R. 790.)

I may particularly notice the case of Walburn v. Ingilby. It was against directors of an unincorporated joint-stock company by a holder of shares. The company was for working mines in Peru. The advertisement was of a capital of £1,000,000 in 20,000 shares of £50 each. The defendants were the original directors, and still continue to be such. The bill stated various acts by which the property of the company was abstracted and appropriated to the defendants. It also set forth that the plaintiff purchased, at various times from different persons, 2000 shares, and

But another question, and closer to the present, arises when an individual claims redress in his own name, and solely on his own account, for a fraud practised by a trustee or director of an association from which he has suffered loss; when, although his claim is founded precisely upon the same facts and relations as many others, yet, as his inj ury and loss is disconnected and peculiar, he seeks to assert his right alone.

The old case of Colt v. Woollaston, (2 P. Wms. 154,) is an example of this character. The plaintiff sought by his bill to be repaid two sums of money advanced to the defendants as managers and projectors of a bubble called The Land Security and Oil Patent, for the purpose of extracting oil out of radishes. There were two plaintiffs, and they purchased six shares each. The company was to have a capital of £100,000. The shares to be 5000, at £20 each. Woollaston bought an estate for £31,800, which was under mortgage for £28,000, and he was to be paid £57,200 out of the fund. It was represented by the defendants to be a most advantageous project. The Master of the Rolls said:—“ This is an imposition, to propose the surplus of the value of an estate (which cost but £31,800), after £85,000 charged upon it—more than double its value—as a security to the contributors who laid out their money upon this project; it is giving them moonshine instead of any thing real.”

“ It is no objection that the parties have their remedy at law, and may bring an action for money had and received; for in case of fraud, a court of equity has a concurrent jurisdiction with a court of law.” The decree was for payment of the money paid, interest, and costs.

In Green v. Barrett, (1 Sim. 45,) the plaintiff was a shareholder, and the defendants were directors of a company, called the Imperial Distillery Company. His bill was to recover a deposit of £100, which he had paid upon twenty shares allotted to him. His communications were with the secretary and bankers of the

In Jones v. Garcia Del Rio, (1 Turner & R. 297), where the bill proceeded upon similar grounds of fraud, three persons filed it as shareholders, on behalf of themselves and others, to have their subscriptions returned. The case came up on an injunction, and a motion to dissolve it after answer. The answer set up that many of the shareholders, who were in the same situation as the plaintiffs, were content to abide by the contracts.

The lord-chancellor said, that the plaintiffs, if they had any demand at all, had each a demand at law, and each a several demand in equity; that they could not file a bill in behalf of themselves and the other holders of scrip : as they were unable to do that, they could not, having three distinct demands, file one bill.

In Blain v. Agar, (1 Sim. 87; 2 id. 289,) the bill was by five persons, on behalf of themselves and numerous other parties to an indenture, by which a large number of shares had been assigned to the five. It was in trust, with a power of attorney to sue, obviously to avoid the difficulty of making all parties. The allegations were of a deceptive prospectus, caused to be printed and published by the directors, and other acts of fraud, in misapplying the deposit money, etc. The bill also showed that some of the original shareholders had transferred their shares to others; and some of the former, with the latter, united in the assignment to the plaintiffs.

The vice-chancellor overruled a demurrer for want of equity, but sustained one ore terms for want of parties, holding that the assignors must be on the record.

The bill was then amended, and the assignment was left out, and naming three other shareholders as parties, stating that they

A general demurrer was taken for want of equity, and one taken ore terms, for want of parties.

The vice-chancellor (Shadwell) held that this was a case of fraud which a court of equity could relieve as well as a court of law, and cited and approved of Colt v. Woollaston. He held that the plaintiffs, in their capacity as original shareholders, could sustain the bill, but not as purchasers from prior purchasers. An objection, for want of-parties, was overruled, the bill stating that the plaintiffs did not know the names of. the other shareholders.

When we consider the arguments of counsel (Mr. Sugden), it will appear that the objection was on the ground that the case could not proceed without the assignors of the scrip assigned being brought in, and upon nothing else.

Lord Brougham is stated by Mr. Colyer, (Col. on Part. § 1101,) to have disapproved, in the case of Thompson v. Paules, of the series of cases I have cited. I have searched ineffectually for this decision. It may well have been placed upon the ground, that this simple case, even of a fraud thus presented, was not proper for a court of chancery, when the remedy was perfect at law.

It must have been upon this ground, or some ground which does not extend to a denial of any redress in any court. This is clear from his other decisions. Walhurn v. Ingilby was before him, and would have been sustained by him, as I consider, but for the technical objections before noticed.

And, in the National Exchange Company v. Drew, (House of Lords, 32 Eng. L. & Eq. 4,) he stated, in the clearest terms, that a deception by a company, through its directors, by representing shares to be worth £100, which were known not to be worth over £50, gave the right of action, on the ground of a false representation, against all who made it.

The case at common law of Gerhard v. Bates, (20 Eng. L. & Eq. 130,) has been much criticised by counsel.

The second count in that case was sustained by the court, and, when analyzed, it presents this case:—That the defendants, and others unknown, had formed a company for the purpose of smelt

Lord Campbell said that had the declaration been, that the defendants delivered the prospectus to the plaintiff, containing the false representation, there could be no question in the case. If the plaintiff had only averred further, that having seen the prospectus, he was induced to purchase the shares, objection might be made that a connection did not sufficiently appear between the act of the plaintiff and the act of the defendant; but the count goes on to aver “ that the defendant, by means of the said false and fraudulent representations, wrongfully and fraudulently induced the plaintiff to become the purchaser and bearer,” etc.

Judgment was given for the plaintiff on this count.

I may observe, that the inducement to purchase, was a false representation of the defendant. By means of that, the plaintiff was deceived, and that false representation was contained in a prospectus issued by the defendant, but, as his lordship impliedly admits, not delivered to the plaintiff by the defendant. It appears to me this means simply, that the fact of a prospectus issued

It is true Williams, Justice, said : Suppose Riches himself had given the fraudulent receipt, would that have constituted a representation by Riches to Coleman ?

This seems to me the nearest approach to the proposition, that the false representation of the principal himself to one party who tiould support an action, is unavailing in favor of another to whom that party has transferred fully the subject-matter of the action, in respect to which the representation was made.

But, as I understand the opinion of the Court, this suggestion is contradicted. The Court say: There was no evidence from which it could be inferred, as between Coleman and Riches, (plaintiff and defendant,) that Riches agreed to give the vendee of corn vouchers of the delivery on which the vendee should act. Had there been such ah agreement, it would have made the case very different, because Riches then would have undertaken to deliver vouchers to Coleman, and to employ proper persons to give such vouchers to him. But there is no evidence of any thing of the kind.

At any rate, I have come to the conclusion, that when a party projects and publicly promulgates the scheme of a joint-stock company; when he causes the usual books to be opened, and allows or causes the inscription of a person as an owner of an interest to a definite amount and value therein which is false within his own knowledge; when he embodies such false-statements in a certificate of this right, directly issued, and of the same effect as if signed by himself; when he accompanies that certificate by a written power, authorizing a transfer at large, by the party to whom he has given the certificate; when that representation induces an innocent person to advance his money: the defendant’s own individual act has created the privity of contract which the cases referred to appear to demand, and he must be held responsible to any one who has been deceived.

The representation was publicly addressed by the defendants to all; was intended to influence all who should become apprised of

We all agree that the order should be affirmed, with costs.

Order affirmed accordingly.