Nash v. Rosesteel

The plaintiff seeks to recover damages resulting from alleged false and fraudulent representations made by defendant to the plaintiff, whereby the latter was induced to buy certain corporate stock. At the time of the transaction complained of the United Wholesale Grocery Company was a corporation engaged in the wholesale grocery business, having an outstanding capital of $116,000, divided into eleven hundred and sixty shares of the par value of $100 each. Defendant owned three hundred shares of this stock and held the position of president of the company. Negotiations were entered into by the parties which, on May 1, 1902, resulted in a sale of the three hundred shares of stock to the plaintiff for the sum of $31,200.

Upon all material issues the court found in favor of the defendant and rendered judgment in accordance therewith. The appeal is from an order denying plaintiff's motion for a new trial, the sole ground urged therefor being that the findings are not supported by the evidence.

The evidence is conflicting, and appellant does not point out wherein any specific finding is not supported.

The court finds that defendant represented to plaintiff that a dividend of six per cent had been declared and paid by the company to its stockholders covering the period extending from July 1, 1901, to January 1, 1902, which representation it further finds to be true. According to the testimony of appellant, this representation constituted the sole inducement for making the purchase. After testifying that he did not see the books of the company, or inventory of its goods, prior to making the purchase, he was asked:

"Q. How did you come to purchase the stock? A. Upon representations of Mr. Rosesteel — the same as anyone would make a purchase of anything upon the representation of somebody else that he thought it was a desirable purchase.

"Q. (By the Court.) Well, what made you think it was a desirable purchase? A. Because of the fact that they were paying six per cent semi-annual dividends.

"Q. (By Mr. Hahn.) And upon any other representation other than the fact that it was paying six per cent dividends, or did you rely upon that one statement alone that it was paying six per cent dividends? A. I think that was the main part, and that they were doing a good business, which they must have been doing to pay that dividend."

He does not attack this finding, but contends that, while the uncontradicted evidence shows that the dividend was paid, there was, at the time of declaring it, no surplus profits out of which to pay it, and that the statement was equivalent to a representation that the company had made a profit during the said period equal to the amount of the dividend. Conceding there was no surplus at the time of declaring and paying this dividend, and that it was paid out of the capital of the company, it was not a matter which, at such time, concerned appellant. (Civ. Code, sec. 309; Baldwin v. Miller Lux etal., 152 Cal. 454, [92 P. 1030].) It is not contended that it was declared for the purpose of effecting a sale of this stock to appellant. The evidence conclusively shows that the board of directors, including the defendant as a member thereof, declared and paid this dividend in an honest belief that they had, during the preceding six months, made a sufficient profit out of which to pay it. Their action in so doing was based upon an inventory and balance sheet furnished by those intrusted with the preparation of the same. Conceding that the books of the company and this inventory exhibited an erroneous condition of the business, it is not, and, indeed, under the evidence, could not be claimed that either the defendant or other member of the board with whom he acted had any knowledge thereof until nearly six months thereafter.

Defendant's good faith in the transaction is not attacked; neither actual knowledge of the alleged erroneous inventory nor an intent to deceive is claimed, but appellant contends that both knowledge and intent must be imputed to him because of the fact that he was a director and as president exercised a general supervision over the affairs of the company. We cannot assent to this contention. On the contrary, defendant as president and his codirectors were justified in relying upon subordinates and employees for data upon which to base their corporate action in declaring the dividend, and were justified, in the absence of anything constituting gross negligence, in accepting and acting upon their reports, which fully warranted defendant in making the representation. (Scott v. De Peyster, I Edw. Ch. 513; Cowley v. Smith, 46 N.J.L. 380, [50 Am. Rep. 432]; Kountze v. Kennedy, 72 Hun, 311, [25 N.Y. Supp. 682], 147 N.Y. 124, [49 Am. St. Rep. 651, 41 N.E. 414].)

Counsel insists that this inventory, which purported to show the merchandise on hand December 31, 1901, had been "padded" by including therein goods to the value of several thousand dollars in excess of that actually in stock. Plaintiff, however, had never seen the inventory, nor was he informed of what it purported to contain. Hence, admitting the truth of his contention, he could not have been misled or deceived by such document. When plaintiff's request that he be permitted to take an invoice of the stock was denied, he was told by defendant that if it should invoice but ninety cents on the dollar he would not sell his stock for less than $104 per share. The value of the assets of the corporation seem to have been ignored in the transaction.

Appellant insists that this action is brought under the provisions of section 1572 of the Civil Code, which defines actual fraud to consist in: 1. "The suggestion, as a fact, of that which is not true, by one who does not believe it to be true"; 2. "The positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true, with intent to deceive another party thereto, or to induce him to enter into the contract." Admitting that the representations set forth in the complaint were false, it is not alleged that defendant did not believe them to be true; nor is there any allegation therein negativing the fact that, if untrue, defendant's information did not warrant him in making the representations. Upon the trial defendant objected to the reception of any evidence upon the ground that there were no actionable issues. We think that the objection should have been sustained. It, therefore, follows that, for the further reason that the complaint is inadequate to sustain a judgment for plaintiff, the order appealed from must be affirmed. (South SanBernardino Co. v. San Bernardino Nat. Bank, 127 Cal. 247, [59 P. 699]; Bates v. Babcock, 95 Cal. 479, [29 Am. St. Rep. 133, 30 P. 605].)

The order denying appellant's motion for a new trial is affirmed.

Allen, P. J., and Taggart, J., concurred.