Frank G. Potts, Appellant, v. J. Edward Lambie, Respondent

Frank G. Potts, Appellant, v. J. Edward Lambie, Respondent. First Department, May 6, 1910. Fraud—deceit in sale of stock — pleading—complaint'— defense — ratification —■ demurrer — waiver. Complaint in an action to recover damages for fraud and deceit in the sale of stock examined, and held, to allege facts constituting a csiuse of action. A separate defense to such action which alleges that after the sale plaintiff, with full knowledge of the facts, “elected to and did ratify and affirm his purchase ” and has ever since retained the stock, is demurrable. Such allegations merely show an election to affirm the purchase and the word “ratify ” is used with reference to the contract as distinguished from the fraud and deceit. The rule that in actions for a rescission there must be a prompt disaffirmance-of the contract has no application to an action for damages for fraud and deceit. The word “ ratify ” as used does not allege a waiver of plaintiff’s right to sue for damages for the fraud, and, if so intended, merely states a legal conclusion. Plaintiff’s right of action for the fraud survives his affirmance of - the contract and retention of the stock. , i Appeal by the plaintiff, Frank Gr. Potts, from an interlocutory judgment of the - Supreme Court in favor of the defendant (as amended), entered in the office of the cleric of the county of New York on the 7th day of January, 1910, upon the decision of the court, rendered after a trial at the New York Special Term, overruling the plaintiff’s demurrer to new matter set up as a defense in the amended answer. Vincent P. Donihee [Edward S. Hatch with him on the brief], for the appellant. Isaac N. Miller, for the respondent. [MAJORITY — Laughlin, J.:] Laughlin, J.: This action is brought to recover damages for fraud and deceit by which the defendant induced the plaintiff to purchase certain shares of the capital stock of the New York Export and Import Company, a corporation organized under the laws of New Jersey. One of the grounds upon which the respondent attempts to sustain the judgment is that the complaint is bad. We are of opinion that the complaint contains every allegation material to such a cause of action. It is therein charged that the defendant was the president of this corporation ; that he was familiar with its financial affairs; that he falsely and fraudulently represented to the plaintiff that it had large and substantial assets, and that it had earned, declared and paid dividends of ten per cent on its common stock in •the years 1902 and 1903; that these statements were false, were known by defendant to be false and were made for the purpose of cheating and defrauding plaintiff by inducing him to purchase the stock; that plaintiff believing and relying upon the representations purchased the stock and paid $6,000 therefor, and that in truth and in fact the corporation had no assets in excess of its liabilities, and had never earned a dividend on its capital stock and that the shares of stock were of no value.. Proof of these facts warrants a recovery. The new matter interposed as a defense, to which the demurrer relates, is in substance that on or about the day the plaintiff purchased the stock he was elected second vice-president and a director of the company, and has ever since been and still is such officer and director; that during the year 1905 it was his special duty as such officer and director to investigate and ascertain the actual financial condition of the company; that on or before the 1st day of January, 1906, he did ascertain and know the exact condition of the company and its earnings from its inception, “ and thereafter, and with full knowledge of the facts, plaintiff elected to and did ratify and affirm his purchase from defendant of his said stock, and has ever since retained the same,-and has not at any timé requested defendant .to rescind the said purchase, or made any demand whatsoever upon defendant in relation to said purchase.” The learned court at Special Term (65 Misc. Rep. 334) held that these allegations in effect show not only an election on the part of the plaintiff to retain the stock, but a waiver of any right to recover damages for the fraud and deceit by which lie was induced to purchase it. The decision is based wholly on the use of the word “ ratify.” We are of opinion that) giving the defendant the full benefit of the liberal rule with respect to the construction of pleadings, these allegations merely show an election on the part of -the plaintiff to affirm the purchase and retain the stock, and that the word “ ratify” should be deemed to have been used with reference to the contract, as distinguished from th & fraud and deceit, and in the sense of affirmance. The learned counsel for the. respondent relies upon decisions of the courts made in actions for a rescission- of a contract and to recover back the consideration, which are clearly distinguishable from this action, which is for damages based on a rescission which has already taken place by the election of the plaintiff on discovering the fr'aud. In this class of actions manifestly the rule with respect to a prompt disaffirmance of the contract has no.application. (See Miller v. Barber, 66 N. Y. 558.) The allegations of the new matter must be construed as a whole, and with the exception of this one word, they are all appropriate and essential to show merely an election to affirm and to retain the stock. It is not a -reasonable construction, we think, to infer from the use of the word.“ ratify,” in the connection in which it is here used, that the pleader intended to allege a waiver of the plaintiff’s right of action for damages for the fraud, and if it were so intended, the use of this word alone is not a statement of. any fact constituting a waiver of the cause of action for damages, and, if attempted to be used in that sense, it is merely an allegation of a legal conclusion. Of course, it is possible that the plaintiff, after having been induced to purchase the stock ■by fraud and deceit, not only may have elected to retain it, but also .to waive his right of action for damages. (14 Am. & Eng. Ency. of Law [2d ed.], 170; Cooley Torts [3d ed.], 965; Pryor v. Foster, 130 N. Y. 171; People v. Stephens, 71 id. 527; St. John v. Hendrickson, 81 Ind. 350. See, also, Cain v. Dickenson, 60 N. H. 371; New York Land Improvement Co. v. Chapman, 118 N. Y. 288; Barr v. N. Y., L. E. & W. R. R. Co., 125 id. 263.) The mere fact, however, of affirming or ratifying the contract by deciding to retain its fruits, as distinguished from approving of the fraud and deceit and waiving any right to redress oh account thereof, is insufficient to show a waiver of the cansé of action for damages. Some act on the part of the plaintiff should be alleged tending to show an intention on his part, not only to affirm the contract and retain the stock, tut to waive his cause of action for damages which, without such waiver, survives such affirmance and retention. The ' allegation is that he “ ratified ” the purchase, and the succeeding words show that this is based on his retention of the stock and failure to rescind the purchase or to make any demand on the defendant concerning it. This cannot be deemed a sufficient allegation to show a waiver of the cause of action for damages and to tender that issue. It follows, therefore, that the interlocutory judgment should be reversed, with costs, and the demurrer sustained, with costs, but with leave to the defendant to amend his answer on payment of the costs of the demurrer and of the appeal. Ingraham, P. J., Clarke, Scott and Hiller, JJ., concurred. Judgment reversed, with costs, and demurrer sustained, with costs, with leave to defendant to amend on payment of costs.