Error to Circuit Court, Kent County; Wm. B. Brown, Judge.

Action by Stephen M. Dinsmore against the National Hardwood Company and others. On dismissal of his declaration, plaintiff brings error. Affirmed.

Before the full bench. [208 N.W. 702] Norris, McPherson, Harrington & Waer, of Grand Rapids, for appellant.

Knappen, Uhl & Bryant, of Grand Rapids, for appellees.

SNOW, J.

The plaintiff assigns error upon the dismissal of his declaration by the trial judge.

This is one of a number of cases recently brought into this court involving what is claimed to have been fraudulent sales of securities of the National Hardwood Company, a Delaware corporation. Thomson v. Kent, Circuit Judge, 203 N. W. 108, 230 Mich. 354; Chapple v. Jacobson et al. (Chapple v. National Hardwood Co. et al.) 207 N. W. 888 and Dinsmore v. National Hardwood Co. et al., 207 N. W. 890. The record does not disclose that defendants Jacobson and Semplimer were ever served with process.

By admission of counsel for plaintiff the fraud as alleged in the declaration is based solely upon doings and proceedings before the Michigan securities commission prior to its authorization of the sale by said corporation of its stocks and bonds. The circuit judge held:

Under the circumstances of this case as alleged in the declaration, the proceedings had and acts done and the statements made before the Michigan securities commission do not constitute a cause of action against the National Hardwood Company, defendant; for this reason the declaration is dismissed.

The sole question before us is as to the correctness of this holding, and we assume in our discussion that the declaration sufficiently alleges material misrepresentations to the commission as to the true status of the company; in what respects it is unnecessary to refer.

Act No. 46, Public Acts of 1915, as amended in 1921 (Pub. Acts 1921, No. 404), now repealed (Pub. Acts 1923, No. 220), was in effect at the time of the alleged fraud on the securities commission. It required, among other things, foreign corporations to obtain permission before offering its stock and securities for sale in this state. Application, containing a statement of the financial condition of the corporation, its assets, and liabilities, together with a copy of its prospectus and advertising matter, had to be first filed with the commission. C. L. 1915, 11948. From this application and such additional information as the commission might demand or acquire, it made its determination on the right to sell. Its records were open to the public. The statute made it a misdemeanor for any one to make false representation for the purpose of deceiving the commission (C. L. 1915, 11963), punishable by fine or imprisonment or both (C. L. 1915, 11967).

The issuing of a certificate by the commission to a corporation to sell its stock and securities, was not, nor was it ever intended, as a guaranty to the public that it could, with impunity, engage in their purchase. To guard against conveying any such impression to any one, the statute expressly provided that there should be printed on such certificate, in type two sizes larger than any other part of the certificate, the words:

The commission does not recommend the purchase of this security. C. L. 1915, 11953.

The application is not made to be used as an inducement to the public to buy the securities of the applicant, but only to give the commission such information as it may require in order that permission to offer the securities for sale may be obtained. Representations to the commission are not intended for the prospective purchaser, and, unless he knows and relied upon them when he purchases, it cannot be advanced that he was in any way influenced by them. Plaintiff makes no claim that he knew of or relied upon the truthfulness of disclosures to the commission. While all records of the proceedings before the commission were at all times open to his inspection, he gave them no attention or consideration until long after he had made the purchase complained of. Shall he then be now permitted to invoke the question of fraud and deceit in representations he claims were made to some other than himself, never intended to reach him, nor to opperate as an inducement for him to buy? This court has not been called upon heretofore to deal directly with this subject, but, after a careful review of the authorities cited by counsel for the respective parties, and from our research, we are not able to find authority upon which appellant's position may be sustained, but in reason, and from strong, well-considered, and exhaustive opinions from other jurisdictions, we hold that the question must be answered in the negative. Following is a brief review of some of these authorities:

Peek v. Gurney, 6 English and Irish Appeals, 377, is a leading case and referred to in practically all of the reported cases which may be regarded as in point. Here a false prospectus was put out by the corporation to induce subscriptions to its stock, and the corporation was held liable to all persons subscribing directly in reliance upon such false prospectus. But it was also held that [208 N.W. 703] there was no liability to persons who purchased the stock in the open market in reliance upon the prospectus, and that the false representations could only be relied upon by persons to whom they were addressed or intended to be communicated, viz. such persons as subscribed directly of the corporation.

Hunnewell v. Duxbury, 28 N. E. 267, 154 Mass. 286,13 L. R. A. 733: In this case a Maine corporation sought to do business in Massachusetts. In order to do so, it had filed with the commissioner of corporations of that state a certificate containing certain false statements as to its assets. The plaintiff claimed to have known of and relied upon these false statements and bought the company's notes because thereof. In holding that no action could be maintained because of the misstatements contained in the certificate, the court said:

The main question, which is raised both by the demurrer to the second count of the declaration and by the exceptions, is whether the plaintiff can maintain an action of deceit for alleged misstatements contained in the certificate. In the opinion of a majority of the court this question should have been decided adversely to the plaintiff. The execution by the defendants of the certificate to enable the corporation to file it under the St. of 1884, c. 330, 3, was too remote from any design to influence the action of the plaintiff to make it the foundation of an action of deceit. To sustain such an action, misrepresentations must either have been made to the plaintiff individually, or as one of the public, or as one of a class to whom they are in fact addressed, or have been intended to influence his conduct in the particular of which he complains. This certificate was not communicated by the defendants, or by the corporation, to the public or to the plaintiff. It was filed with a state official for the definite purpose of complying with a requirement imposed as a condition precedent to the right of the corporation to act in Massachusetts. Its design was not to procure credit among merchants, but to secure the right to transact business in the state.

And again:

In the case at bar, the certificate was made and filed for the definite purpose, not of influencing the public, but of obtaining from the state a specific right, which did not affect the validity of its contracts, but merely relieved its agents in Massachusetts of a penalty. It was not addressed to or intended for the public, and was known to the plaintiff only from the search of his attorney. It could not have been intended or designed by the defendants that the plaintiff should ascertain its contents and be induced by them to take the notes. It is not such a representation, made by one to another with intent to deceive, as will sustain the action. Its statements are in no fair sense addressed to the person who searches for, discovers, and acts upon them, and cannot fairly be inferred or found to have been made with the intent to deceive him.

Greene v. Mercantile Trust Co., 111 N. Y. S. 802, 60 Misc. Rep. 189: Here, too, the action was for fraud and deceit, based on a false prospectus issued and circulated by the defendants. The case of Peek v. Gurney, supra, was declared as undoubtedly the law of the state of New York. Brackett v. Griswold, 20 N. E. 376,112 N. Y. 470;Kuelling v. Lane Mfg. Co., 75 N. E. 1098, 183 N. Y. 78, 2 L. R. A. (N. S.) 303, 111 Am. St. Rep. 691, 5 Ann. Cas. 124;Squiers v. Thompson, 76 N. Y. S. 734, 73 App. Div. 555.

The court further said:

One of the essential elements necessary to sustain actions of this nature is that the false representations made should have been intended to influence the action of the particular person defrauded, or the action of a class of which he is a constituent member.

Also:

On the face of the prospectus, we cannot see how the plaintiff can base any right of action against the defendants for deceit in buying the stock of the shipbuilding company, for he was not the person addressed or intended to be influenced by it.

Hindman v. First National Bank, 112 F. 931, 50 C. C. A. 623, 57 L. R. A. 108: In the state of Kentucky an insurance company could not do business until all its capital stock had been actually paid in in cash, nor until the insurance commissioner was satisfied of this fact and issued a license. The defendant bank made certificate that it had on deposit such an amount. Before the plaintiff bought stock, he went to the office of the insurance commissioner and examined the certificate of the bank, and bought stock in the company relying on its truth. It was not true; the stock was worthless, and plaintiff brought suit against the bank. It was held that the plaintiff had no right to rely upon the certificate, unless the company actually referred him to the certificate. Without such reference the court argues:

To what extent did the plaintiff have a right to rely upon the truth of the representations contained in the cashier's certificate? Some direct connection between the bank and the plaintiff in error in the communication of this certificate is essential to a recovery. If the statement was addressed to, and intended only to influence the action of, the state insurance commissioner in respect to the licensing of the insurance company, he cannot sustain a recovery, even though he and others may have been led into the purchase of the shares of the insurance company as a consequence of the action of the insurance commissioner in admitting the company to do business upon the representation of the bank's certificate. The plaintiff's action, in the aspect of it now under consideration, is for fraud and deceit, and such an action must be bottomed upon false representations made to him, and with intent that he should be influenced thereby. The plaintiff does not sufficiently connect himself with the misrepresentations by the bare fact that he bought stock in a company which was improperly admitted to do business upon representations addressed to the state commissioner. The injury in such case is too remote.

[208 N.W. 704] A writ of certiorari in this case was denied by the United States Supreme Court. 22 S. Ct. 943, 186 U. S. 483, 46 L. Ed. 1261.

Cheney v. Dickinson, 172 F. 109, 96 C. C. A. 314,28 L. R. A. (N. S.) 359: This was an action to recover damages because of a false prospectus put out by the company. The plaintiff, however, purchased stock from another stockholder at less than par, relying upon statements in the prospectus. In denying the right of recovery, the court said:

Only one inference can be drawn from the prospectus. The defendants were inviting every one into whose hands the prospectus should come to buy treasury stock. That was in aid of the conspiracy, and the only conspiracy, which the evidence tended to sustain. And to all persons who bought treasury stockwho paid their money into the fund over which the defendants had a control and interest in commonrelying on the truth of the statements of fact in the prospectus, all of the defendants who were parties to the false statements might well be held answerable in damages. But the plaintiff so far as the defendants were concerned, was a purchaser on the market. And while the sponsors for false prospectuses that are issued to bring in money to the common treasury are justly made to respond to all persons who take the invited action, yet the law recognize no right of action in one who relies without invitation on a statement addressed to a particular class which he stays out of.

The action in the instant case, based entirely upon claimed fraud and deceit upon the sureties commission, must, in view of all recognized authority, fail. The proceedings before the commission, under the law, were for the commission, and not intended to influence the public in buying the company's securities.

The circuit judge was right in his conclusion that in the case presented by the declaration, plaintiff had no right of action against the National Hardwood Company. The exceptions of plaintiff are dismissed, with costs to the defendant.

BIRD, C. J., and SHARPE, FELLOWS, WIEST, CLARK, and McDONALD, JJ., concur.

STEERE, J., took no part in this decision.

Action by John M. Brennan against the National Equitable Investment Company, Inc. Judgment for plaintiff, entered on a verdict, was reversed on the law by the Appellate Division (221 App. Div. 658, 224 N. Y. S. 572), and the complaint was dismissed, and plaintiff appeals.

Affirmed.

See, also, 210 App. Div. 426, 206 N. Y. S. 280.

[247 N.Y. 487]Appeal from Supreme Court, Appellate Division, First Department.
Joseph Sterling and Aaron Lipper, both of New York City, for appellant.

A. O. Dawson, W. W. Ahrens, and John K. Watson, all of New York City, for respondent.

[247 N.Y. 488] O'BRIEN, J.

Plaintiff purchased stock in defendant corporation under such circumstances as amount, so he alleges, to misrepresentation and fraud. For a short time dividends were disbursed, but then their payment was suspended. He rescinded his contract of purchase, tendered return of his stock, and brought this action at law on his rescission to recover the purchase price. After the institution of the action, payment of dividends was temporarily resumed, and plaintiff accepted and retained them. In his reply to the supplemental answer he alleges that such moneys were fraudulently paid out of capital, and that he accepted them not as dividends but as a partial return of the purchase price of the stock, [247 N.Y. 489]and that upon the trial he would offer them as credit to defendant. Evidence tends to prove that before the resumption of dividends a representative of plaintiff and of other stockholders notified some of defendant's officers that dividends had not been earned, that if declared they could be paid only out of capital, and that he would advise stockholders, including plaintiff, to accept them not as such but as moneys on account to reimburse them partially for their losses on purchase of their stock. It tends further to show that plaintiff was so advised by this representative, and that he did not regard the dividend checks, although they were plainly labeled as such, as anything more

[160 N.E. 925]

than partial restitution of money which he claims had been stolen from hom. The fact is that, after the rejection of his tender of the stock and after the institution of this action, he accepted and cashed these dividend checks and retained their proceeds until he credited them to defendant on the trial. Plaintiff's judgment, entered upon the verdict, was reversed and the complaint dismissed. The reason stated by the Appellate Division for reversal is that, by the acceptance and retention of the dividends, plaintiff treated the contract as in existence and so defeated his claim of rescission. We agree with the result.

[1] The rule is thoroughly established that an assertion of a rescission is nullified by the subsequent acceptance of benefits growing out of a contract claimed to have been rescinded. This rule is specially applicable to contracts for the purchase of stock claimed to have been fraudulently sold. When, with knowledge of the facts, the purchaser accepts dividends, he will be held to have waived the fraud and to have ratified his purchase. Black on Rescission (1st Ed.) 347. He cannot by words cancel his contract and then continue to assert rights and benefits under it. Gravenhorst v. Zimmerman, 236 N. Y. 22, 38, 139 N. E. 766, 27 A. L. R. 1465. Declarations of rescission followed by acts which negative them must be regarded in such [247 N.Y. 490]a light as to require the inference of an abandonment of the declared act. Generally, the issue is one of fact, whether the commission of certain acts shows an intent to waive a rescission. Whipple v. Prudential Ins. Co. of America, 222 N. Y. 39, 46,118 N. E. 211; Gravenhorst v. Zimmerman, supra; Clark v. Kirby, 243 N. Y. 295, 302, 153 N. E. 79. Waiver is rarely established as a matter of law, but an intent contrary to apparent acts must be disclosed.

[2] A duty to speak is imperative as matter of law where conduct, accompanied by silence, would be deceptive and beguiling. Lord Const. Co. v. Edison Portland Cement Co., 234 N. Y. 411, 416, 138 N. E. 39. Intent cannot remain concealed in one's bosom with the expectation that such a mental reservation can become the decisive factor in litigation. It must be communicated. Sometimes words are sufficient, but when the intent is to reaffirm a rescission it must be manifested by some act consistent with the idea of rescission. When the acts performed are inconsistent with the claim of repudiation, then there is an election to confirm and adopt the contract, but when these acts are trivial in comparison with the entire subject-matter of the transaction, they will not be held, as matter of law, to amount to a confirmation of the contract. Weigel v. Cook, 237 N. Y. 136, 140, 141, 142 N. E. 444.

[3] One claiming fraud may rescind his purchase and sue to get his money back, or he may keep his purchase and sue to recover damages for fraud. He cannot do both. Clark v. Kirby, supra. In an action in equity for a rescission of a purchase of bonds, the coupons may be cashed for the benefit of the party against whom the action is brought (Bloomquist v. Farson, 222 N. Y. 375, 381,118 N. E. 855), for then the act is not inconsistent with the plaintiff's position. In such an action he has not pretended to rescind. He brings the action for that express purpose. Kley v. Healy, 127 N. Y. 555, 28 N. E. 593, does not touch the situation. One who has been defrauded may be excused in certain circumstances from the tender of money. A common instance is where the amount so [247 N.Y. 491]paid is one that might be retained in any event irrespective of the outcome of the litigation. 3 Williston, Contracts, 1530; Brocklehurst & Potter Co. v. Marsch, 225 Mass. 3, 10, 113 N. E. 646. The rule has relation to the formality of tender preceding or accompanying the announcement of rescission. It does not mean that even after rescission has been announced and the time for tender has gone by, the victim of the fraud may continue to deal with the subject-matter of the transaction as if it were his own. There is then a ratification by conduct irrespective of his professions. Brown v. Foster, 108 N. Y. 387, 391,15 N. E. 608;Schenck v. State Line Tel, Co., 238 N. Y. 308, 313, 144 N. E. 592, 35 A. L. R. 1149.

[4][5] When moneys are paid as dividends, a shareholder is not at liberty to avoid the effect of his acceptance by a notice not assented to by the company that he will take them as something else. Fuller v. Kemp, 138 N. Y. 231, 238,33 N. E. 1034,20 L. R. A. 785.

Plaintiff's intention to retain the dividends is plain. His complaint and his silence for years removes the question of intent from the domain of the jury. He rescinded his contract and tendered return of the stock in August, 1923. He received his first dividend after rescission in October and did not verify his complaint until November 22. In that pleading he alleges payment of $9,080 for his stock, and the relief which he demands is a judgment for $9,080. No allegation or mention is made of receipt by him of any money, either in the form of dividends or otherwise, subsequent to his rescission and, consequently, no offer to credit them to defendant. He received other dividends as late as October, 1925. The supplemental answer was not served until nearly three years after the verification of the complaint, and not until the reply to that answer did plaintiff disclose

[160 N.E. 926]

any intent to look upon the dividends as anything except dividends, nor did he before that time express a disposition to credit them to defendant on the trial. Defendant cannot be bound by the threat made by one who represented or claimed to represent [247 N.Y. 492]a large body of stockholders. Plaintiff's attitude for years was apparently so perfectly free from ambiguity that no question of fact exists. His retention of the dividends paid to him subsequent to his discovery of the alleged fraud and subsequent to the institution of his action on rescission must be held, as matter of law, to constitute an abandonment of rescission and a reaffirmation of the contract.

The judgment should be affirmed, with costs.

CARDOZO, C. J. (concurring).

[6] I concur in the conclusion that the plaintiff ratified the purchase by the acceptance of the dividends.

Our decision will, however, be misleading unless a question which may seem to be here, but which is excluded by the record, is explicitly reserved.

The question is not here whether equitable jurisdiction in cases of accident or mistake is broad enough to give relief against a ratification by conduct that is merely thoughtless or inadvertent. Cf. Standard Oil Co. of Ky. v. Hawkins (C. C. A.) 74 F. 395, 399, 33 L. R. A. 739;Adair v. Brimmer, 74 N. Y. 539, 554;Trustees, etc., of Town of Easthampton, v. Bowman, 136 N. Y. 521, 32 N. E. 987. Without asserting at this time that such jurisdiction exists, I am unwilling by anything now said to negate or discredit it. For the purpose of this appeal, I prefer to assume that relief will be granted against the consequences of mistake, whether it be characterized as one of fact or law, if there was lacking an intent to ratify, if the absence of this intent was obvious to the other party to the transaction, if no prejudice will be wrought by undoing the apparent choice, and if discovery of the mistake is followed by a prompt return of any benefits received. 3 Williston, Contracts, 1591. On the record before us, not all these conditions can be held to have been satisfied. The plaintiff has not tendered a return of the dividends collected pendente lite, and he has not shown that his conduct will not prejudice the defendant. He does not [247 N.Y. 493]effect the needed readjustment by a mere credit of the payments in reduction of the verdict. With the defendant insolvent and in the hands of a receiver, the allowance of such a credit is the allowance of a preference, for the moneys, if returned, would be assets belonging to the defendant in which all the creditors would share. There has been a failure to supply the data upon which an equitable readjustment could be accomplished, if the other conditions essential to relief against mistake were taken as established.

The judgment should be affirmed, with costs.

POUND, CRANE, ANDREWS, LEHMAN, and KELLOGG, JJ., concur with O'BRIEN, J.

CARDOZO, C. J., concurs in memorandum in which all concur.

Judgment affirmed.

[819] [820] [821] Howard L. Bump and John N. Hughes, both of Des Moines, Iowa, for plaintiff in error.

Vincent Starzinger and F. W. Lehmann, Jr., both of Des Moines, Iowa, for defendants in error.

Before LEWIS, Circuit Judge, and VAN VALKENBURGH and FARIS, District Judges.

VAN VALKENBURGH, District Judge (after stating the facts as above).

It should be kept in mind at the outset that this case involves no sporadic case of stock-jobbing by a concern conceived and organized for that specific purpose without substantial business foundation. The Goodyear Tire & Rubber Company is one of perhaps four large corporations of similar character which have been developed in connection with the phenomenal growth of the automobile industry. At the time of the transaction here involved it had been in business for 22 years, and was known throughout the United States and abroad as a business concern of great magnitude. It had then and still has assets running high into the millions. Its sales were and are tremendous in volume. Its business activities are complex and far-reaching, territorially and otherwise, and its standing in the business world has been such as to enlist credit from conservative financial sources far beyond the ordinary range. All these conceded facts must be accorded their proper weight in determining whether in the present instance this defendant has departed from a course of fair dealing and has committed the fraud charged in the complaint.

Now, as to the misrepresentations alleged, if the plaintiff in error fails to sustain its allegations in this respect, his case must fail, even though his investment turned out to be an unfortunate one. This court has held, following the established rule, that: "Representations, to constitute sufficient basis for an action of deceit, must be fact statements, must be untrue, and known to be untrue, or else recklessly made, must be made with intent to deceive, and for the purpose of inducing the other party to act, and the other party must rely thereon, and be induced thereby to act to his injury." Pain v. Kiel et al. (C. C. A.) 288 F. 527, 529.

It is first charged that, in making up the prospectus of assets, real estate, buildings, machinery, and equipment, the real estate and buildings were appreciated $5,000,000, making the total $47,898,160.38. It appears that prior to April 30, 1920, these items were carried on the books of the company at $42,898,160.38. Plaintiff in error claims that this increase by $5,000,000 was fraudulent. The only evidence upon the subject comes from officers and others connected with the defendant company. They state that these items were always carried at a [822] very low figure, and that the highest allowable percentage of depreciation was applied; further, that many items of reconstruction were treated as repairs and carried under operating expenses; that other items, which were tangible and proper to be included, had been ignored in bookkeeping. It appears, without attempt at concealment, that this property had been carried at the lowest permissible figure to accomplish a saving in taxes. Whatever may be the fact about this, it was incumbent upon plaintiff in error to establish by the proofs that the property in question was of a value less than that represented. All the testimony in the case is to the contrary. Any doubt which might arise from the bookkeeping addition made is dissipated by the report of the accountants for the bankers, upon which plaintiff in error seeks to rely, bearing date October 31, 1920. The value there shown corresponds almost exactly with the value stated in the prospectus, and at that date it is conceded that the affairs of defendant in error were at their lowest ebb.

It is next charged that, under the heading "Securities Owned," the investment in the Goodyear Tire & Rubber Company in Canada was carried at $4,061,980.48, when the actual cash investment therein was but $682,980.48. It was shown in testimony, without contradiction, that the amount added to the cash investment was a stock dividend which had been issued to the parent company, defendant in error, out of earnings of the Canada subsidiary. There was no showing that this subsidiary had not made the earning from which this dividend was declared. In the absence of such dividend the parent company might have drawn down this sum in cash. It left the money with the subsidiary, taking stock in lieu thereof. Under such circumstances it cannot be said that its representation in this particular was false, within the definition attaching to actionable fraudulent representations.

It is next urged that the prospectus failed to disclose that the company had built a club house for the use of its employees at a cost of $1,500,000. The weight of the testimony is that this club house was built prior to 1920. It was built for the purpose of providing greater facilities for the company's employees. It was regarded by it as a good investment. We do not think that the failure to discuss this item in its prospectus could be regarded as a concealment of the company's condition amounting to fraud. As well might it be contended that it was the duty of the Goodyear Company to disclose in its prospectus its entire previous course of business, in order that it might be judged whether its management had been judicious and free from criticism.

The fourth specification is that the prospectus failed to disclose that the president of the company, F. A. Seiberling, was indebted to the company for more than $3,500,000, and that other large sums had been loaned to other officers of the company. This item was carried under the head of "Sundry Debtors." But little is contained in the record with respect to loans to other officers of the company; the principal emphasis being laid upon the Seiberling item. At the outset it may be stated that no evidence was introduced, nor substantial claim made, that these officers were not fully able to meet their obligations to the company; the inferential claim being that loans to officers are improper per se, and, if made, should have been disclosed on the face of the prospectus. We find in this contention no support for the charge of fraudulent concealment. Mr. Seiberling was placed upon the stand as a witness for plaintiff in error. He was the president and one of the founders of the corporation. He explained that he had a running account with the company, which consisted largely of company property taken and held in his name for business convenience; this included real estate, patents, and, perhaps, other items; that sometimes the balance would be in his favor, and sometimes in favor of the company; that the charge against him upon the books of the company did not at any time represent his personal obligation, except in part. This statement is corroborated in parts of the evidence tendered by plaintiff in error. From such, it appears that the account of Seiberling was closed by the company taking over the Goodyear Athletic Field, containing 30 acres, and one-half ownership of the Akron, Canton & Youngstown Railway Company, represented by $7,500,000 par value of the stock, which properties were stated to have been acquired for the benefit of the Goodyear Company and were essential to the proper conduct of its business. Thus considered, the transaction presents no element of fraud as disclosed by this record.

The fifth specification is that plaintiff in error subscribed for original stock, and that the defendants went upon the market and bought stock and delivered it to him, instead of the original capital stock. This charge finds no support in the record.

The next charge is that it was represented in the prospectus that, after declaring [823] a common stock dividend of 150 per cent., the company had a surplus belonging to common stockholders of more than $12,000,000; that when the stock was sold to plaintiff the company failed to disclose that it had outstanding, not included as liabilities in its financial statements, large amounts of contracts for raw materials, known as "commitments," on which the price was then declining, and which resulted in losses to the company of $19,000,000. We have already seen that the annual sales of the Goodyear Company at the time this prospectus was issued had reached the tremendous total of $200,000,000. A vast amount of material, rubber and fabric, had to be available for the prompt manufacture of the product involved in these sales. Much of this could be procured only in foreign countries. Much time was necessarily consumed in transportation, and the manufacturer was obliged to provide against the uncertainties of market supply and the alertness of its competitors. In other words, if this large business, with its great overhead expense, were to operate successfully and economically, its raw material must be at hand when required. It, therefore, as had been its practice, had contracted in advance for large quantities of rubber and fabric at a price then far below the market; in fact, its commitments continued to be at prices below the market until the autumn of 1920.

At the time the prospectus was issued, and at the time this stock was sold, it convincingly appears that these contracts were regarded by it as of great value. They were carried neither as an asset nor a liability. No complaint is made that they were not carried as an asset. At that time the contingency that they might become an obligation was not anticipated. The business depression which followed was not foreseen in view of business conditions at that time. However, this is largely a matter of bookkeeping. No witness testified that it is proper practice to carry such an item as an obligation upon a balance sheet. One witness states that in issuing such a prospectus he would have called attention to this arrangement in a footnote merely. All things considered, the failure in the prospectus to list these commitments for raw material, then undoubtedly regarded as a wise and profitable business provision, cannot be regarded as a fraudulent concealment knowingly or recklessly made with intent to deceive. Later, it is true, owing to the business depression in the fall of 1920, to which reference will be hereafter made, the company experienced a great loss, which more than wiped out its surplus; but this happening cannot alter the principle involved.

The seventh specification is that the statement that the net earnings of the company applicable to the payment of dividends on outstanding preferred stock had exceeded 54 per cent. per annum for the 10 years preceding was false. This charge is not supported in the testimony. It is shown in evidence offered by plaintiff in error that dividends of at least 48 per cent. were paid. From this showing several concededly prosperous years were omitted, in which dividends may have been paid. In any event, plaintiff in error failed to establish the falsity of the representation, and that it was tainted with fraud.

It is next urged that the statement in the prospectus that the company then had and did maintain for the benefit of preferred stockholders net current assets in amount not less than 110 per cent. and total net assets to an amount not less than 200 per cent. of the total amount of preferred stock outstanding was false. Reference to the prospectus discloses that the statement upon which this charge is based is contained by way of recital under the heading "Description of Preferred Stock," in which the restrictions and covenants by which that stock was assumed to be protected were detailed. Therein this clause appears: "The company shall maintain at all times net tangible assets of not less than 200 per cent. and net current assets of not less than 110 per cent. of the par value of the preferred stock outstanding." Therein is contained no express statement as to net assets then on hand. The balance sheet, contained in the prospectus and taken from the books of the company, showed, of course, that it had such assets. As applied to the future, the representation would be without effect in any event. As to the condition existing at the time the stock was sold, no evidence was produced which would indicate that the company and its officers did not believe that the condition of the company justified the representation made.

Finally, it is contended that the company failed to disclose that the corporation was then in a failing financial condition and would be required to borrow a large sum of money in October, 1920, to refinance and reorganize the company, thereby wiping out and destroying the real value of the stock then to be offered to the plaintiff and others. This is a general charge that, at the time the prospectus and balance sheet were put forth and this stock sold, the Goodyear Company, [824] through its officers, knew that it was in a failing condition, or at least that its stock was practically worthless; that by October, 1920, it would be compelled to borrow money in large amounts and pass through the process of reorganization, which later took place. The record fails to justify this charge, and we are impelled to the conclusion that, however unfortunate the business experience of the defendant company may have been later in the year, at the time the alleged representations were made, and the stock of plaintiff in error was acquired, the defendant company is not shown to have anticipated the great change which took place in the business affairs of the country.

It is a matter of common knowledge that, beginning in the late summer and extending into the fall of 1920, the business of the country generally passed through a period of deflation and depression that brought loss, and even ruin, to business enterprises of supposed soundness and strength. This was particularly true of those industries depending largely upon great volume of sales and requiring large lines of credit to enable them to carry this volume of business. Sales fell off to an appalling extent; values declined accordingly; decreased demand for finished products produced decreased demand for raw materials, and the price of such decreased proportionately; but obligations remained fixed, and a company organized as was the Goodyear Company obviously could not reduce its overhead rapidly enough to keep pace with changed conditions. It is to this state of affairs, which came on in an astonishingly short period, that the defendant company ascribes the misfortune which overtook it, and the record, as well as common knowledge, supports this view.

It is urged by counsel for defendants in error that this court can take judicial notice of these matters, and from the language of the Supreme Court in Lincoln Gas Co. v. Lincoln, 250 U. S. 256-268, 39 S. Ct. 454, 63 L. Ed. 968, this would seem to be so. However, we are not faced with this necessity, because counsel for plaintiff in error in their briefs say: "We have no quarrel with the assertion that the court, both trial court and this appellate court, may take notice that a financial depression commenced in the late fall of 1920 and lasted for some considerable time." Furthermore, officers of the Goodyear Company introduced by plaintiff in error stated that, based upon past experience, they had made a budget of sales for 1920 aggregating $250,000,000. It is conceded that the budget contemplated at least $220,000,000. The actual sales were $204,000,000. This alone would account for a large part of the deficit in anticipated revenues of the company. There are many items, to which reference need not here be made, which further depleted the treasury.

The principal error assigned is that the court excluded evidence upon which plaintiff in error relied to show the falsity, not only of the specific representations made, but that the financial condition of the company generally in April, 1920, was not as represented. This evidence may be reduced practically to the reports made by Price, Waterhouse & Co., expert accountants, October 31, 1920, and later in 1921. The court excluded these statements as furnishing no proper index of the condition of the company six months before that time for several reasons. In the first place, these accountants were employed by the bankers who undertook to refinance and reorganize the Goodyear Company. Their object was to make a statement which would justify the safe investment of many millions of dollars by their employers. In so doing they made, naturally, a very conservative estimate of assets. In other words, to use a common expression, they cut them to the bone. They discounted all accounts and bills receivable that were not certain of ready collection and payment. Large losses did occur through the falling off of business and the decline in the price of raw materials. All these things explain in large measure, if not entirely, the difference in values appearing between the Goodyear statements of April, 1920, and the statements of the accountants made in the late fall of 1920 and the spring of 1921.

Furthermore, the court held that, in view of the great financial depression conceded to have taken place in the fall of 1920 and thereafter, a statement of the condition of the company at that time, conditions being materially changed, could furnish no safe guide from which the jury could determine the condition of the company in the spring and early summer of the same year. We think the court was right in so holding.

The court further refused to admit quotations of the Goodyear stock for a period extending from December 11, 1920, to October 31, 1921, as furnishing no index of the value of that stock at the time plaintiff in error purchased. This ruling was correct for several reasons. It is a matter of common knowledge that a period of depression, such as has been shown to exist, coupled with the necessity of refinancing and reorganizing, would of itself depress the price of any [825] stock upon the market without regard to its actual intrinsic value. Furthermore, stock quotations are in themselves not conclusive as to the actual value of the stock of a company. Such quotations are governed in great part by the demand — whether bidding is active or otherwise. This action differs from one for rescission in a very important particular. In the latter case, if fraudulent representations are shown, a plaintiff may recover, even though what he receives be equal in value to that with which he parts; but, in an action on the case for damages, the rule is otherwise. It is then incumbent upon him to prove that the property at the time of the sale was worth less than the price paid, and how much less. Sigafus v. Porter, 179 U. S. 116, 21 S. Ct. 34, 45 L. Ed. 113; Nupen v. Pearce, 235 F. 497, 149 C. C. A. 43; Richardson v. Lowe et al., 149 F. 625, 79 C. C. A. 317.

Plaintiff in error bought his stock in July, 1920, and sold it October 25, 1922. The amount he received furnishes no index of the value of the stock at the time he bought it. We conclude, then, that the charge of fraudulent representations knowingly and recklessly made as an inducement to plaintiff in error to purchase his stock is not sustained; that the evidence excluded by the court was properly excluded; that, even though that evidence had been admitted, plaintiff in error has failed to show the difference in value between that he parted with and that which he received. Plaintiff in error has evidently proceeded upon the assumption that because, after the intervention of a great industrial depression, the financial condition of the Goodyear Company within a period of six months was substantially reduced, that condition could not have been as represented at the beginning of that period. If the case had been submitted, the jury would have been furnished with no recognized basis upon which to found its verdict. It would have been compelled to resort to speculation and to find for the plaintiff, if at all, upon the ground that he had suffered a loss in his investment. The court realizes the difficulties in proof which confronted the plaintiff in this case. It is only one of the many cases in which the plaintiff fails in his testimony, but this cannot justify any departure from settled rules of proof resting upon all plaintiffs. Patton v. Texas & Pacific Railway, 179 U. S. 658, loc. cit. 663, 21 S. Ct. 275, 45 L. Ed. 361.

The judgment below is accordingly affirmed.

CERTIORARI TO THE CIRCUIT COURT OF APPEALS FOR THE SECOND CIRCUIT.

Mr. Louis D. Brandeis and Mr. Edward F. McClennen, with whom Mr. William H. Dunbar was on the brief, for petitioner.

Mr. Eugene Treadwell, with whom Mr. Edward Lauterbach was on the brief, for respondents.

[209] MR. JUSTICE HOLMES delivered the opinion of the court.

This is a bill in equity brought by the petitioner to rescind a sale to it of certain mining rights and land by the defendants' testator, or in the alternative to recover damages for the sale. The bill was demurred to and the demurrer was sustained. 136 Fed. Rep. 915. Then the bill was amended and again demurred to, and again the demurrer was sustained, and the bill was dismissed. This decree was affirmed by the Circuit Court of Appeals. 148 Fed. Rep. 1020; 79 C.C.A. 534. The ground of the petitioner's case is that Lewisohn, the deceased, and one Bigelow, as promoters, formed the petitioner that they might sell certain properties to it at a profit, that they made their sale while they owned all the stock issued, but in contemplation of a large further issue to the public without disclosure of their profit, and that such an issue in fact was made. The Supreme Judicial Court of Massachusetts has held the plaintiff entitled to recover from Bigelow upon a substantially similar bill. 188 Massachusetts, 315.

The facts alleged are as follows: The property embraced in the plan was the mining property of the Old Dominion Copper Company of Baltimore, and also the mining rights and land [210] now in question, the latter being held by one Keyser, for the benefit of himself and of the executors of one Simpson, who with Keyser owned the stock of the Baltimore company. Bigelow and Lewisohn, in May and June, 1895, obtained options from Simpson's executors and Keyser for the purchase of the stock and the property now in question. They also formed a syndicate to carry out their plan, with the agreement that the money subscribed by the members should be used for the purchase and the sale to a new corporation, at a large advance, and that the members, in the proportion of their subscriptions, should receive in cash or in stock of the new corporation the profit made by the sale. On May 28, 1895, Bigelow paid Simpson's executors for their stock on behalf of the syndicate, in cash and notes of himself and Lewisohn, and in June Keyser was paid in the same way.

On July 8, 1895, Bigelow and Lewisohn started the plaintiff corporation, the seven members being their nominees and tools. The next day the stock of the company was increased to 150,000 shares of twenty-five dollars each, officers were elected, and the corporation became duly organized. July 11, pursuant to instructions, some of the officers resigned, and Bigelow and Lewisohn and three other absent members of the syndicate came in. Thereupon an offer was received from the Baltimore company, the stock of which had been bought, as stated, by Bigelow and Lewisohn, to sell substantially all its property for 100,000 shares of the plaintiff company. The offer was accepted, and then Lewisohn offered to sell the real estate now in question, obtained from Keyser, for 30,000 shares, to be issued to Bigelow and himself. This also was accepted and possession of all the mining property was delivered the next day. The sales "were consummated" by delivery of deeds, and afterwards, on July 18, to raise working capital, it was voted to offer the remaining 20,000 shares to the public at par, and they were taken by subscribers who did not know of the profit made by Bigelow and Lewisohn and the syndicate. On September 18, the 100,000 and 30,000 [211] shares were issued, and it was voted to issue the 20,000 when paid for. The bill alleges that the property of the Baltimore company was not worth more than $1,000,000, the sum paid for its stock, and the property here concerned not over $5,000, as Bigelow and Lewisohn knew. The market value of the petitioner's stock was less than par, so that the price paid was $2,500,000, it is said, for the Baltimore company's property and $750,000 for that here concerned. Whether this view of the price paid is correct, it is unnecessary to decide.

Of the stock in the petitioner received by Bigelow and Lewisohn or their Baltimore corporation, 40,000 shares went to the syndicate as profit, and the members had their choice of receiving a like additional number of shares or the repayment of their original subscription. As pretty nearly all took the stock, the syndicate received about 80,000 shares. The remaining 20,000 of the stock paid to the Baltimore company, Bigelow and Lewisohn divided, the plaintiff believes, without the knowledge of the syndicate. The 30,000 shares received for the property now in question they also divided. Thus the plans of Bigelow and Lewisohn were carried out.

The argument for the petitioner is that all would admit that the promoters (assuming the English phrase to be well applied) stood in a fiduciary relation to it, if, when the transaction took place, there were members who were not informed of the profits made and who did not acquiesce, and that the same obligation of good faith extends down to the time of the later subscriptions, which it was the promoters' plan to obtain. It is an argument that has commanded the assent of at least one court, and is stated at length in the decision. But the courts do not agree. There is no authority binding upon us and in point. The general observations in Dickerman v. Northern Trust Co., 176 U.S. 181, were obiter, and do not dispose of the case. Without spending time upon the many dicta that were quoted to us, we shall endeavor to weigh the considerations on one side and the other afresh.

The difficulty that meets the petitioner at the outset is that [212] it has assented to the transaction with the full knowledge of the facts. It is said, to be sure, that on September 18, when the shares were issued to the sellers, there were already subscribers to the 20,000 shares that the public took. But this does not appear from the bill, unless it should be inferred from the ambiguous statement that on that day it was voted to issue those shares "to persons who had subscribed therefor," upon receiving payment, and that the shares "were thereafter duly issued to said persons," etc. The words "had subscribed" may refer to the time of issue and be equivalent to "should have subscribed" or may refer to an already past event. But that hardly matters. The contract had been made and the property delivered on July 11 and 12, when Bigelow, Lewisohn and some other members of the syndicate held all the outstanding stock, and it is alleged in terms that the sales were consummated before the vote of July 18 to offer the stock to the public had been passed.

At the time of the sale to the plaintiff, then, there was no wrong done to any one. Bigelow, Lewisohn and their syndicate were on both sides of the bargain, and they might issue to themselves as much stock in their corporation as they liked in exchange for their conveyance of their land. Salomon v. Salomon & Co. [1897], A.C. 22; Blum v. Whitney, 185 N.Y. 232; Tompkins v. Sperry, 96 Maryland, 560. If there was a wrong it was when the innocent public subscribed. But what one would expect to find, if a wrong happened then, would not be that the sale became a breach of duty to the corporation nunc pro tunc, but that the invitation to the public without disclosure, when acted upon, became a fraud upon the subscribers from an equitable point of view, accompanied by what they might treat as damage. For it is only by virtue of the innocent subscribers' position and the promoter's invitation that the corporation has any pretense for a standing in court. If the promoters after starting their scheme had sold their stock before any subscriptions were taken, and then the purchasers of their stock with notice had invited the public to [213] come in and it did, we do not see how the company could maintain this suit. If it could not then, we do not see how it can now.

But it is said that from a business point of view the agreement was not made merely to bind the corporation as it then was, with only forty shares issued, but to bind the corporation when it should have a capital of $3,750,000; and the implication is that practically this was a new and different corporation. Of course, legally speaking, a corporation does not change its identity by adding a cubit to its stature. The nominal capital of the corporation was the same when the contract was made and after the public had subscribed. Therefore what must be meant is, as we have said, that the corporation got a new right from the fact that new men who did not know what it had done had put in their money and had become members. It is assumed in argument that the new members had no ground for a suit in their own names, but it is assumed also that their position changed that of the corporation, and thus that the indirect effect of their acts was greater than the direct; that facts that gave them no claim gave one to the corporation because of them, notwithstanding its assent. We shall not consider whether the new members had a personal claim of any kind, and therefore we deal with the case without prejudice to that question, and without taking advantage of what we understand the petitioner to concede.

But, if we are to leave technical law on one side and approach the case from what is supposed to be a business point of view, there are new matters to be taken into account. If the corporation recovers, all the stockholders, guilty as well as innocent, get the benefit. It is answered that the corporation is not precluded from recovering for a fraud upon it, because the party committing the fraud is a stockholder. Old Dominion Copper Mining and Smelting Co. v. Bigelow, 188 Massachusetts, 315, 327. If there had been innocent members at the time of the sale, the fact that there were also guilty ones would not prevent a recovery, and even might not be a sufficient [214] reason for requiring all the guilty members to be joined as defendants in order to avoid a manifest injustice. Stockton v. Anderson, 40 N.J. Eq. 486. The same principle is thought to apply when innocent members are brought in later under a scheme. But it is obvious that this answer falls back upon the technical diversity between the corporation and its members, which the business point of view is supposed to transcend, as it must, in order to avoid the objection that the corporation has assented to the sale with full notice of the facts. It is mainly on this diversity that the answer to the objection of injustice is based in New Sombrero Phosphate Co. v. Erlanger, 5 Ch. D. 73, 114, 122.

Let us look at the business aspect alone. The syndicate was a party to the scheme to make a profit out of the corporation. Whether or not there was a subordinate fraud committed by Bigelow and Lewisohn on the agreement with them, as the petitioner believes, is immaterial to the corporation. The issue of the stock was apparent, we presume, on the books, so that it is difficult to suppose that at least some members of the syndicate, representing an adverse interest, did not know what was done. But all the members were engaged in the plan of buying for less and selling to the corporation for more, and were subject to whatever equity the corporation has against Bigelow and the estate of Lewisohn. There was some argument to the contrary, but this seems to us the fair meaning of the bill. Bigelow and Lewisohn, it is true, divided the stock received for the real estate now in question. But that was a matter between them and the syndicate. The real estate was bought from Keyser by the syndicate, along with his stock in the Baltimore company, and was sold by the syndicate to the petitioner along with the Baltimore company's property, as part of the scheme. The syndicate was paid for it, whoever received the stock. And this means that two-fifteenths of the stock of the corporation, the 20,000 shares sold to the public, are to be allowed to use the name of the corporation to assert rights against Lewisohn's estate that [215] will enure to the benefit of thirteen-fifteenths of the stock that are totally without claim. It seems to us that the practical objection is as strong as that arising if we adhere to the law.

Let us take the business point of view for a moment longer. To the lay mind it would make little or no difference whether the 20,000 shares sold to the public were sold on an original subscription to the articles of incorporation or were issued under the scheme to some of the syndicate and sold by them. Yet it is admitted, in accordance with the decisions, that in the latter case the innocent purchasers would have no claim against any one. If we are to seek what is called substantial justice in disregard of even peremptory rules of law, it would seem desirable to get a rule that would cover both of the almost equally possible cases of what is deemed a wrong. It might be said that if the stock really was taken as a preliminary to selling to the public, the subscribers would show a certain confidence in the enterprise and give at least that security for good faith. But the syndicate believed in the enterprise, notwithstanding all the profits that they made it pay. They preferred to take stock at par rather than cash. Moreover, it would have been possible to issue the whole stock in payment for the property purchased, with an understanding as to 20,000 shares.

Of course, it is competent for legislators, but not, we think, for judges, except by a quasi-legislative declaration, to establish that a corporation shall not be bound by its assent in a transaction of this kind, when the parties contemplate an invitation to the public to come in and join as original subscribers for any portion of the shares. It may be said that the corporation cannot be bound until the contemplated adverse interest is represented, or it may be said that promoters cannot strip themselves of the character of trustees until that moment. But it seems to us a strictly legislative determination. It is difficult, without inventing new and qualifying established doctrines, to go behind the fact that the corporation remains one and the same after once it really exists. [216] When, as here, after it really exists, it consents, we at least shall require stronger equities than are shown by this bill to allow it to renew its claim at a later date because its internal constitution has changed.

To sum up: In our opinion, on the one hand, the plaintiff cannot recover without departing from the fundamental conception embodied in the law that created it; the conception that a corporation remains unchanged and unaffected in its identity by changes in its members. Donnell v. Herring-Hall-Marvin Safe Co., 208 U.S. 267, 273; Salomon v. Salomon & Co. [1897], A.C. 22, 30. On the other hand, if we should undertake to look through fiction to facts, it appears to us that substantial justice would not be accomplished, but rather a great injustice done, if the corporation were allowed to disregard its previous assent in order to charge a single member with the whole results of a transaction to which thirteen-fifteenths of its stock were parties, for the benefit of the guilty, if there was guilt in any one, and the innocent alike. We decide only what is necessary. We express no opinion as to whether the defendant properly is called a promoter, or whether the plaintiff has not been guilty of laches, or whether a remedy can be had for a part of a single transaction in the form in which it is sought, or whether there was any personal claim on the part of the innocent subscribers, or as to any other question than that which we have discussed.

The English case chiefly relied upon, Erlanger v. New Sombrero Phosphate Co., 3 App. Cas. 1218, affirming S.C., 5 Ch. D. 73, seems to us far from establishing a different doctrine for that jurisdiction. There, to be sure, a syndicate had made an agreement to sell, at a profit, to a company to be got up by the sellers. But the company, at the first stage, was made up mainly of outsiders, some of them instruments of the sellers, but innocent instruments, and, according to Lord Cairns, the contract was provisional on the shares being taken and the company formed (p. 1239). There never was a moment when the company had assented with knowledge of the facts. [217] The shares, with perhaps one exception, all were taken by subscribers ignorant of the facts, 5 Ch. D. 113, and the contract seems to have reached forward to the moment when they subscribed. As it is put in 2 Morawetz, Corp. (2d ed.) § 292, there was really no company till the shares were issued. Here thirteen-fifteenths of the stock had been taken by the syndicate, the corporation was in full life and had assented to the sale with knowledge of the facts before an outsider joined. There most of the syndicate were strangers to the corporation, yet all were joined as defendants (p. 1222). Here the members of the syndicate, although members of the corporation, are not joined, and it is sought to throw the burden of their act upon a single one. Gluckstein v. Barnes [1900], A.C. 240, certainly is no stronger for the plaintiff, and in Yeiser v. United States Board & Paper Co., 107 Fed. Rep. 340, another case that was relied upon, the transaction equally was carried through after innocent subscribers had paid for stock.

Decree affirmed.