People v. Compact Associates, Inc.

Per Curiam.

This action is brought by the Attorney-General for an injunction pursuant to subdivision 12 of section 63 of the Executive Law. The section provides that ‘ ‘ Whenever any person shall engage in repeated fraudulent or illegal acts or otherwise demonstrate persistent fraud or illegality in the carrying on, conducting or transaction of business ” the Attorney-General is authorized to bring the proceeding. After an extended trial, the court sustained the charges of the Attorney-General.

Objection is based on two grounds: first, that persistent fraud was not established; second, that even if it were established as against certain defendants, it was not as against others.

Taking these propositions in order, we believe that ‘ ‘ persistent fraud ” in the context of the statute was established. Without, for the moment, differentiating between the defendants, it was shown that their business was the sale of vacuum cleaners at retail. The method of procedure was as follows: A salesman would call at the prospective buyer’s residence and explain that he wished to demonstrate a new product. He would not reveal the nature of the product, but would explain that the seller did not advertise and consequently had funds for promotion. He would then pay the housewife $5 in cash or trading stamps for the privilege of giving the demonstration. He would also present her with a paper called a “ Bond of Friendship ” which presumably evidenced the friendly relationship of the parties. He would then demonstrate the machine and attempt to make a sale and have her sign a conditional sales contract. At this stage, as circumstances would require, different procedures would be adopted. Invariably, however, it was explained to the prospect that if she gave the salesman any leads that developed into sales, she would get a $25 credit for each sale made; and even when no sale eventuated, a credit would be given of $12.50 for every four instances where a demonstration was permitted. It was established that in several instances salesmen refused to take the machine away after the demonstration and got signatures to contracts by false representations as to the nature of the contract. It was also clear that in many instances the purchaser was not in a financial position to buy such an expensive machine and without undue pressure would not have done so.

We agree with Judge Valente’s opinion in dissent that there is nothing illegal or fraudulent in door-to-door sales, nor in inducing sales by offering credits for leads to sales to others. However, we believe that the method by which sales were induced — particularly paying for the privilege of demonstrating, presentation of the so-called “ Bond of Friendship ”, and concealment of the nature of the product until the sales talk developed — created an atmosphere conducive to fraud. Concededly, this is not a sufficient base for injunctive relief, but it does furnish grounds, when coupled with proof of several instances of actual fraud, for a finding of ‘‘ persistent fraud.” Some 30 such instances were established at the trial. This is not an impressive number when measured against 20,000 sales.* However, that is not all the evidence. Over 1,000 persons who signed contracts refused to pay their installments. There is no proof that all of them claimed fraud, but it should be recalled that most of the sales were made to low-income people who, without legal representation, were in no position to make such an assertion. Also, there were over 100 complaints of fraud in the selling made to the Better Business Bureau. An interview between the executive officers of defendants and that bureau resulted in a significant comment made by the former. It was stated that they could not control their salesmen. We conclude that these facts make a sufficient showing of persistent fraud.

As to the relationship of the defendants, it appears that the vacuum cleaners are manufactured by Interstate Engineering Corp., a California corporation, and not a defendant. It has several distributors to whom it sells the cleaners at a price of $70 a machine. It also has devised the plan of selling and supplies the necessary documents. The distributor with whom the defendants deal is Compact Associates, Inc., a New Jersey corporation, likewise not a defendant. This company sells the machines at $90 a machine to subdistributors. The price to the consumer, with financing, comes to nearly $300. In addition, this company passes on the sales literature prepared by the manufacturer. It also conducts a course for the training of salesmen employed by the subdistributors. The subdistributors have the privilege of using Capital Discount Corp. to discount sales contracts, but may use any other finance company, or none at all if they so choose. But, as regards their sales, they follow the methods originated by the manufacturer and passed on to them by the distributor. The individual defendants Sindelman and Eisenberg own all the stock of Compact Associates, Inc., the New Jersey corporation, and of a New York corporation similarly named, which is a subdistributor.

All of the respondents, with the exception below noted, are doing the same kind of business in the same way and the only differentiation is the area covered. The atmosphere conducive to fraud is common to all of them. The fact that more instances were established as against some than as against others is not significant. Nor is the fact that against certain respondents the number, standing alone, would not suffice to establish persistent fraud.

The exception above referred to is Capital Discount Corporation. This company did no selling. It financed the conditional sales contracts for the companies owned by Sindelman and Eisenberg and such others as desired to use their services. No fraud was established against Capital Discount. The mere fact that it was owned by the principals of one of the selling companies is of no significance in this action, however important it might be if suit were brought on any of the contracts assigned to it. The Attorney-General did not seek to have any particular sales contract avoided. And such relief as was sought against this defendant, namely, for improper practices in the collection, was not established. Furthermore, it is doubtful if such practices could be the subject of injunction pursuant to the Executive Law. The complaint against this respondent should have been dismissed.

The judgment consequently requires modification. Moreover, the findings of fact go far beyond what was established and in certain instances relate to facts that are altogether irrelevant. The conclusion of law is satisfactory. It is unnecessary to discuss the so-called prayer for relief attached to the findings as this, except as it is reflected in the judgment itself, is meaningless. Certain of the ordering paragraphs of the judgment rest on no foundation of proof in the record, or are immaterial to accomplish the purposes of the action or impose restrictions not warranted in law. In these categories are the third, fourth, fifth and sixth ordering paragraphs.

Judgment should be modified by dismissing the complaint against Capital Discount Corp., and striking the third, fourth, fifth and sixth ordering paragraphs. Findings of fact should not be approved and new findings should be substituted. Judgment as so modified should be affirmed, without costs.

FINDINGS

1. That respondents engaged in a centrally directed plan to sell vacuum cleaners manufactured by Interstate Engineering Corp.

2. That, pursuant to this plan, corporate defendants’ salesmen, going from door to door, represented that they were demonstrating a new product; that they represented that they would and, in fact, did, pay to prospective buyers $5 or the equivalent for observing the demonstration; that they gave to prospective buyers a document called a “ Bond of Friendship ” and a written explanation of the same; that they stated that this procedure was in lieu of advertising; and that they represented that a bonus would be paid for leads to sales.

3. That in addition, corporate respondents’ salesmen persistently made representations beyond what was authorized by said respondents to the effect that no sale was being made, that the prospective purchaser was only giving a receipt for the machine left with him, that the purchase price was less than that stated, and other false and fraudulent representations to induce conditional sales contracts to be made.

4. That the method of selling authorized by corporate respondents provided a ready cover for its salesmen to exceed their authority and use fraudulent means to obtain sales contracts, by concealing the basic nature of the transaction in the initial stage and accompanying the sale by the devices described above.

5. That in a number of cases salesmen did make fraudulent representations and that corporate respondents were unable to prevent them from so doing.

6. That the sales practices of respondent corporations amounted to persistent fraud.

7. That all of respondent corporations used the same methods and adopted common plans of procedure.

8. That the individual defendants are officers and employees of the corporate defendants and either directed or carried out the sales practices above described.

* This figure does not purport to be accurate. It is a witness’ estimate, when pressed to give some estimate. Other evidence indicates that less than half that number would be nearer the fact.