American Sign Co. v. Electro-Lens Sign Co.

• Decision Date: 03 November 1913
• Docket Number: 15,602.
• Citation: 211 F. 196
• Parties: AMERICAN SIGN CO. v. ELECTRO-LENS SIGN CO. et al.
• Court: U.S. District Court — Northern District of California

211 F. 196

AMERICAN SIGN CO. v. ELECTRO-LENS SIGN CO. et al.

No. 15,602.

United States District Court, N.D. California.

November 3, 1913

Willard P. Smith and Judson W. Reeves, both of San Francisco, Cal for plaintiff.

W. W Sanderson, of San Francisco, Cal., for defendants.

VAN FLEET, District Judge.

The action is to recover on promissory notes made by the defendant corporation and indorsed by its codefendants for deferred payments on the purchase price, under a contract of sale, of certain territorial rights or privileges under patents owned by the plaintiff; and the primary question presented by the demurrer and motion to strike interposed by plaintiff to the answer and cross-complaint is whether in an action at law in this court on a contract not under seal the defense of failure of consideration based on fraud inducing the making of the contract can be interposed, the contention of plaintiff being that such a defense has no competent place on the law side in a federal court, but is cognizable only in equity.

The substantive question has given rise to some difference of view and decision in the lower federal courts, arising largely, I think, out of an unwarranted extension in some cases of the principles announced in the case of George v. Tate, 102 U.S. 564, 26 L.Ed. 232, the leading case relied upon by plaintiff to sustain its contention. That case was an action to recover on a bond given to prevent the levy or execution of a writ of attachment, wherein the defendants answered that they were induced to enter into the bond by the false and fraudulent representations of the plaintiff's assignors. The trial court excluded evidence of the alleged fraud, and the Supreme Court in sustaining this ruling used this language:

'Proof of fraudulent representations by Myers & Green, beyond the recitals in the bond, to induce its execution by the plaintiff in error, was properly rejected.

'It is well settled that the only fraud permissible to be proved at law in these cases is fraud touching the execution of the instrument, such as misreading, the surreptitious substitution of one paper for another, or obtaining by some other trick or device an instrument which the party did not intend to give. Hartshorn et al. v. Day, 19 How. 211 (15 L.Ed. 605); Osterhout v. Shoemaker et al., 3 Hill (N.Y.) 513; Belden v. Davies, 2 N.Y.Super.Ct. 466; Franchot v. Leach, 5 Cow. (N.Y.) 506. The remedy is by a direct proceeding to avoid the instrument. Irving v. Humphrey, 1 Hopk.Ch. (N.Y.) 284.'

The plaintiff construes this language as announcing the broad doctrine that fraud in procuring the making of a contract, regardless of whether it is one under seal or not, may never be availed of in a federal court to avoid its obligation, otherwise than by bill or other appropriate method on the equity side. And this is the view of that case adopted in Levi v. Mathews, 145 F. 152, 76 C.C.A. 122, cited by plaintiff, and some others of like character. These cases need not be particularly considered further than to say that, while some of them, like Levi v. Mathews, involved contracts under seal, and others contracts not under seal, they proceed alike upon the theory that the question as to the existence of any distinction in the nature of the contract in that regard is concluded by the language of George v. Tate, and are decided in obedience to what is conceived to be the rule there announced.

Is that case justly susceptible of the interpretation thus sought to be put upon it? With the greatest respect for the courts entertaining that view, I find myself wholly unable to give it my acquiescence. To my mind, it is based upon a misapprehension which overlooks the character of the case with which the court was dealing. It is a cardinal rule in construing the language of a decision that it must be read with particular reference to the facts before the court, and this principle, as it appears to me, must be wholly ignored to give the language of that case the sweeping effect contended for. The instrument there in suit was a bond under seal, a specialty, and it was with reference to the rights of the parties under such a contract that the court was speaking. When therefore, in announcing the applicable rule of law, the court employs the somewhat general and comprehensive expression, 'It is well settled * * * in these cases,' etc. (italics ours), we are bound, not only in fairness but in obedience to the rules of construction, to confine the application of its language to the class of cases represented by the one before the court-- cases involving sealed instruments. And that this class was what the court had in mind, and all it had in mind, is, I think, conclusively evidenced by the character of the cases referred to as authority for the rule announced. All the cases cited by the court involved contracts under seal: Hartshorn v. Day, an assignment of a patent under seal; Osterhout v. Shoemaker, a deed; Belden v. Davies, a release under seal; Franchot v. Leach, a formal contract for the sale of land; Irving v. Humphrey, a composition and release by creditors. And all of them confine the discussion of the rule in its application to that class of contracts. As thus, in Hartshorn v. Day:

'The general rule is that, in an action upon a sealed instrument in a court of law, failure of consideration, or fraud in the consideration, for the purpose of avoiding the obligation, is not admissible as between the parties and privies to the deed,' etc.

These considerations, it seems to me, show very clearly the proper limitations of the rule the court was declaring in George v. Tate, and that it had application alone to contracts under seal. And, thus construed, the case but announces a principle then old and familiar with reference to that class of contracts; whereas the construction contended for would commit the court to a doctrine not only at variance with that obtaining at common law, but with the rule prevailing in most, if not all, of the states of the union.

That courts of law have concurrent jurisdiction with courts of equity in matters of fraud in all instances where the relief sought is such that a court of law, with its more rigid remedies, is capable of affording it, has long been established; and that this principle has application to actions and proceedings in federal courts, notwithstanding the method of our procedure which requires the separate administration of legal and equitable remedies, has been recognized in repeated decisions of the Supreme Court. Thus in Buzard v. Houston, 119 U.S. 347, 7 Sup.Ct. 249, 30 L.Ed. 451, where the bill sought to set aside the written assignment of a contract alleged to have been obtained by fraudulent representations, and to restore the complainant to his original contract, the court dismissed the bill because the remedy at law was adequate, and said:

'In cases of fraud or mistake, as under any other head of chancery jurisdiction, a court of the United States will not sustain a bill in equity to obtain only a decree for the payment of money by way of damages, when the like amount can be recovered at law in an action sounding in tort or for money had and received. * * *

'The present bill states a case for which an action of deceit could be maintained at law, and would afford full, adequate, and complete remedy. * * * If the plaintiffs should be ordered to be reinstated in all their rights under that agreement, and permitted now to tender performance thereof on their part, the only relief which they could have in this suit would be a decree for damages to be assessed by the same rules as in an action at law. * * * If the exchange of the contracts was procured by the fraud alleged, it would be no more binding upon the plaintiffs at law than in equity; and in an action of deceit the plaintiffs might treat the assignment of the contract with Mosty as void, and, upon delivering up that contract to the defendant, recover full damages for the nonperformance of the original agreement. * * * A judgment for pecuniary damages would adjust and determine all the rights of the parties, and is the only redress to which the plaintiffs, if they prove their allegations, are entitled.'

So in Equitable Life Assur. Soc. v. Brown, 213 U.S. 25, 29 Sup.Ct. 404, 53 L.Ed. 682, which was a bill brought by a policy holder against an insurance company for an accounting and the...