that the corporation would in any event have to pay the debt, apparently losing sight of the fact that the corporation could be much more readily financed if its property were unincumbered, and that the existence of the mortgage is for that reason material. § 214. Materiality of representations as to promoter's profits. While a promoter selling his own property to the company need not, if fairly disclosing his interest in the transaction, disclose the cost of the property to him,80 a false statement by the promoter as to the price paid by him for the property, is a misstatement of a material fact which may become the subject of an action for fraud and deceit.81 A misstatement, in the deed by 80. Re Christineville Rubber Estates, Ltd., 106 L. T. N. S. 260, 81 L. J. Ch. N. S. 63. See also ante, § 115. V. 81. Federal. Cortes Co. Thannhauser, 45 Fed. Rep. 730, 739. Alabama.-Alabama Foundry & Mach. Works v. Dallas, 127 Ala. 513, 29 So. 459. California.-Burbank v. Dennis, 101 Cal. 90, 100, 35 Pac. 444, 447448; Ex-Mission Land & Water Co. v. Flash, 97 Cal. 610, 32 Pac. 600. Iowa.-Teachout v. Van Hoesen, 76 Iowa 113, 118, 40 N. W. 96, 98, 1 L. R. A. 664; Hunter v. French League Safety Cure Co., 96 Iowa 573, 65 N. W. 828. Maryland.-McAleer 35 Md. 439. V. Horsey, Michigan.-Stoney Creek Woolen Co. v. Smalley, 111 Mich. 321, 69 N. W. 722. Missouri.-Hess v. Draffen, 99 Mo. App. 580, 74 S. W. 440; Garrett v. Wannfried, 67 Mo. App. 437. New Jersey-Woodbury Heights Land Co. v. Loudenslager, 55 N. J. Eq. 78, 89, 35 Atl. 436, affirmed, 56 N. J. Eq. 411, 41 Atl. 1115, but modified, 58 N. J. Eq. 556, 43 Atl. 671. New York.-Getty v. Devlin, 54 N. Y. 403; Sandford v. Handy, 23 Wend. 260; Van Slochem v. Villard, 207 N. Y. 587, 101 N. E. 467. & Ohio.-Shawnee Commercial Savings Bank Co. v. Miller, 24 Ohio C. C. 198, 212, et seq. Pennsylvania.-Simons v. Vulcan Oil & Mining Co., 61 Pa. 202, 221, 100 Am. Dec. 628; Burns v. McCabe, 72 Pa. 309. Wisconsin.-Franey V. Warner, 96 Wis. 222, 71 N. W. 81; Fountain Spring Park Co. v. Roberts, 92 Wis. 345, 66 N. W. 399, 53 Am. St. Rep. 917. United Kingdom and Colonies.— Gluckstein v. Barnes, 1900, App. Cas. 240, 247, 258; Kent v. Freehold Land & Brickmaking Co., L. R. 4 Eq. 588, 17 L. T. N. S. 77, reversed on another ground, L. R. 3 Ch. App. which the property was acquired by the promoter, of the consideration paid therefor, amounts to a misrepresentation of the cost of the property and may give rise to an action for fraud.82 A false statement as to the promoter's profits is also a misrepresentation of a material fact.83 § 215. Materiality of representations as to promoter's interest. The promoter's interest in the corporation, and the property to be acquired by it, is always a material fact, a misstatement of which constitutes an actionable misrepresentation. A representation that the company is acquiring certain property from a third party, is a misrepresentation of a material fact if the promoters are themselves the owners of the property and the real vendors,84 or have acquired control of the property by means of options.85 See also ante, § 117. As to misrepresentations of value as actionable frauds, see McAleer v. Horsey, 35 Md. 439; Ginn v. Almy, 212 Mass. 486, 99 N. E. 276; Busterud v. Farrington, 36 Minn. 320, 31 N. W. 360; Hess v. Draffen, 99 Mo. App. 580, 74 S. W. 440; Shawnee, etc., Co. v. Miller, 24 Ohio C. C. 198. For cases dealing with the question whether a false representation, made by a vendor, as to the cost of the property to him, is in general a misrepresentation of a material fact, see note to Kohl v. Taylor, 35 L. R. A. N. S. 174, also cases cited in Teachout V. Van Hoesen, 76 Iowa 113, 118-119, 40 N. W. 96, 99, 1 L. R. A. 664, in Van Slochem v. Villard, 207 N. Y. 587, 101 N. E. 467, and in note to Cottrill v. Krum, 18 Am. St. Rep. 549, 556–558. 82. Woodbury Heights Land Co. v. Loudenslager, 55 N. J. Eq. 78, 89, 35 Atl. 436, affirmed, 56 N. J. Eq. 411, 41 Atl. 1115, but modified, 58 N. J. Eq. 556, 43 Atl. 671. A false recital, in the deed to the corporation, of the price paid by the promoters, is likewise actionable. Hichens v. Congreve, 4 Russ. 562. So also is a false receipt given by the original vendor to the promoter. Stoney Creek Woolen Co. v. Smalley, 111 Mich. 321, 69 N. W. 722. 83. Urner v. Sollenberger, 89 Md. 316, 330, 43 Atl. 810; Seaman v. Low, 4 Bosw. (N. Y.) 337. And see post, §§ 231, 232-233, 239. 84. Paddock v. Fletcher, 42 Vt. 389. Franey v. Warner, 96 Wis. 222, 235, 71 N. W. 81, 85; Hebgen v. Koeffler, 97 Wis. 313, 320, 72 N. W. 745, 747-748. In re Leeds & Hanley Theatres of Varieties, 1902, 2 Ch. Div. 809, 824, A representation that property is to be purchased by the company at a certain price, when only a part of such price is to be paid to the owners and the residue retained by the promoters, is a fraud upon the corporation and the subscribers for its shares.86 A representation that property sold to the corporation is owned by the promoter and other stockholders named, has been held fraudulent where the fact was that the promoter was himself the sole owner of the property.87 A false representation that the promoters are themselves shareholders in the corporation is a misrepresentation of a material fact,88 but a failure to mention the fact that the promoters 828; Clarke v. Dickson, 6 C. B. N. As to admissibility of evidence that promoters in dealing through a nominal party, instead of openly selling to the corporation, acted under advice of counsel, see Components Tube Co. v. Naylor, 1900, 2 Ir. R. 1, 73. 85. Virginia Land Co. v. Haupt, 90 Va. 533, 19 S. E. 168, 44 Am. St. Rep. 939; West End Real Estate Co. v. Nash, 51 W. Va. 341, 41 S. E. 182. 86. Federal.-Cortes Co. V. Thannhauser 45 Fed. Rep. 730. Colorado.-Zang V. Adams, 23 Colo. 408, 48 Pac. 509, 58 Am. St. R. 249. Mississippi.-Selma M. & M. R. R. Co. v. Anderson, 51 Miss. 829. 'Pennsylvania.-Short v. Stevenson, 63 Pa. 95. Texas.-Hall v. Grayson County Nat'l Bank, 36 Tex. Civ. App. 317, 330, 81 S. W. 762, 769. Virginia.-West End Real Estate Co. v. Claiborne, 97 Va. 734, 34 S. E. 900. Wisconsin.-Fountain Spring Park Co. v. Roberts, 92 Wis. 345, 66 N. W. 399, 53 Am. St. Rep. 917. United Kingdom and Colonies.The Lindsay Petroleum Co. v. Hurd, L. R. 5 P. C. 221; Clarke v. Dickson, 6 C. B. N. S. 453; Capel & Co. v. Sim's Ships Composition Co., 57 L. J. Ch. N. S. 713; Smith v. Chadwick, L. R. 20 Ch. Div. 27, 55, 46 L. T. N. S. 702, affirmed, L. R. 9 App. Cas. 187, 5 Am. & Eng. Corp. Cas. 23. 87. Alabama Foundry & Mach. Works v. Dallas, 127 Ala, 513, 29 So. 459. 88. Shawnee Commercial & Savings Bank Co. v. Miller, 24 Ohio C. C. 198, 213. are subscribing for shares is not a ground for the rescission of a subscription made in ignorance thereof. 89 A representation that the promoters are putting their money into the enterprise is a misrepresentation of a material fact if the promoters are, unknown to the subscribers, paying for their shares by a transfer of property," or are because of any other circumstance not in fact risking their money in the enterprise.91 If, however, the promoters openly sell their own property to the corporation and at the same time subscribe for shares, the fact that the transaction is consummated by offsetting the subscription price of the promoters' shares against the price to be paid for the promoters' property, is of no moment.92 There is authority for the proposition that promoters falsely representing that they have subscribed for a certain number of shares may be compelled to make their representation good,93 but the better rule seems to be that a representation of that char 90. Moore V. Warrior Coal & Land Co., 178 Ala. 234, 242, 59 So. 219, 222, Am. & Eng. Ann. Cas, 1915 B. 173; McAleer v. Horsey, 35 Md. 439, 454, et seq.; Nichols v. Buell, 157 Mich. 609, 122 N. W. 217; Heckscher v. Edenborn, 203 N. Y. 210, 221, 96 N. E. 441, reversing, 137 N. Y. App. Div. 899, 122 Supp. 1131, which followed, 131 N. Y. App. Div. 253, 264, 115 Supp. 673; Paddock v. Fletcher, 42 Vt. 389; Wilson V. Hotchkiss, 2 Ont. L. R. 261, affirmed, sub nom. Milburn v. Wilson, 31 Can. S. C. 481. See Walker v. Anglo-Am. Mtge. & Trust Co., 72 Hun (N. Y.) 334, 55 St. Rep. 54, 25 Supp. 432, where the promoters paid for their shares by the transfer of the good will of the business taken over by the company. 91. Cortes Co. v. Thannhauser, 45 Fed. Rep. 730, 738-739; Coulter v. Clark, 160 Ind. 311, 66 N. E. 739; Hinkley v. Sac Oil & Pipe Line Co., 132 Iowa 396, 407, 107 N. W. 629, 633, 119 Am. St. Rep. 564. See Hall v. Grayson County Nat'l Bank, 36 Tex. Civ. App. 317, 81 S. W. 762, where the promoter was, under a secret agreement with the vendor, partially indemnified against loss on his subscription. 92. Richardson V. Graham, 45 W. Va. 134, 30 S. E. 92, and see Heckscher v. Edenborn, 203 N. Y. 210, 224, 96 N. E. 441. 93. Moore & De La Torre's Case, L. R. 18 Eq. 661. See also post, § 234, note 97. acter does not constitute any contract with the corporation, and that the only liability of the promoters is a liability for fraud to the persons deceived thereby.94 Promoters who falsely state that moneys in the treasury of the corporation represent moneys paid by them on account of their subscriptions, may be estopped from afterwards claiming that such moneys were loaned to the corporation.95 § 216. Materiality of representations as to identity or position of persons selling property to corporation. A statement that a person mentioned by name, selling property to the company had such confidence in the future of the enterprise that, having the option to receive a part of the purchase price in cash or in shares, he had elected to take the larger part in shares, was held to be a material misrepresentation where the fact was that the person named was a mere dummy who had no interest whatsoever in the transaction, and that the promoter was himself the real owner of the property sold to the corporation.96 The production of a letter recommending the purchase by the corporation of property under consideration, stating that the investment was a good one at the price and that the writer would himself have purchased the property had he known that it could be had at the price, was held to constitute an actionable fraud in view of the fact that the writer of the letter was himself the owner of a portion of the property mentioned, and that the price quoted was a false one made to the proposed company with a view to allowing the promoter to secure for himself a substantial advance over the actual price to be paid to the owners.97 94. Moore Bros. & Co., Ltd., 1899, 1 Ch. Div. 627, followed in Todd v. Millen, 1910, Sess. Cas. 868. See also Haines v. Franklin, 87 Fed. Rep. 139. 95. See Spackman v. Lattimore, 3 Giff. 16. 96. In re Leeds & Hanley Theatres of Varieties, 1902, 2 Ch. Div. 809, 824, 828. See also Components Tube Co. v. Naylor, 1900, 2 Ir. R. 1, 31-32. 97. Lindsay Petroleum Co. V. Hurd, L. R. 5 P. C. 221. |