Equitable Life Ins Co of Iowa v. Halsey, Stuart Co

• Decision Date: 03 March 1941
• Docket Number: No. 291,291
• Parties: EQUITABLE LIFE INS. CO. OF IOWA v. HALSEY, STUART & CO
• Court: U.S. Supreme Court

312 U.S. 410

61 S.Ct. 623

312 U.S. 668

85 L.Ed. 920

EQUITABLE LIFE INS. CO. OF IOWA

v HALSEY, STUART & CO.

No. 291.

Argued Jan. 15, 16, 1941.

Decided March 3, 1941.

As Amended on Denial of Rehearing March 31, 1941.

Messrs. Joseph G. Gamble and Alden B. Howland, both of Des Moines, Iowa, for petitioner.

Mr. Edward R. Johnston, of Chicago, Ill., for respondent.

Mr. Justice STONE delivered the opinion of the Court.

Petitioner brought this suit in the District Court for Northern Illinois to recover damages suffered by reason of alleged fraudulent statements made by respondent's agents which induced petitioner to purchase of respondent a large number of Longview (Washington) local improvement bonds. The trial to a jury resulted in a verdict and judgment for petitioner in the sum of $66,150. The Court of Appeals for the Seventh Circuit reversed on the ground that some of the untrue statements, on the faith of which petitioner had purchased the bonds, were within the protection of the 'hedge clause' which appeared in a circular by which respondent had offered the bonds for sale to petitioner. The clause read:

'All statements herein are official or are based on information which we regard as reliable, and while we do not guarantee them, we ourselves have relied upon them in the purchase of this security.' (112 F.2d 302, 305.)

The court found that another untrue statement contained in a letter written by respondent's agent to petitioner was 'carelessly made', but, taken alone, was too trivial in its effect in inducing petitioner to purchase the bonds, to support the verdict. It also held that there was no breach of legal duty on the part of respondent or its officers in their failure to reveal to petitioner facts known to respondent indicating that a financial statement of a guarantor of the bonds, submitted to petitioner by respondent's agent, on the faith of which petitioner had bought the bonds, did not truly represent the financial condition of the guarantor. We granted certiorari October 14, 1940, 311 U.S. 626, 61 S.Ct. 40, 85 L.Ed. —-, upon a petition which asserted the failure of the court below to follow state law in its rulings, the questions presented being of public importance because they involve the relation of the federal courts to the states.

We summarize briefly the evidence submitted to the jury which bears on the contentions made before us. Respondent is a large dealer in bonds and securities, with an office in Chicago. Petitioner is an Iowa corporation having its office and principal place of business in Iowa where the transactions resulting in the sale of the bonds in question took place. In May, 1930, respondent through an agent offered to sell petitioner a quantity of the bonds of the Longview local improvement districts. The offering was by printed circular issued by respondent on April 7, 1927, which described the bonds as payable from proceeds of special assessments to be levied upon the benefited properties and stated that their payment was guaranteed principal and interest by Long-Bell Lumber Company, whose balance sheet for the year ending December 31, 1926, was printed in the circular. The circular stated 'LONGVIEW IS SITUATED ABOUT 133 MILES SOUth Of seattle at the confluence of the Columbia and Cowlitz Rivers. It has a frontage of 7 1/4 miles on the former, and is a port of call for ocean-going vessels midway between Portland and the Pacific Ocean. * * * Because of its natural advantages and proximity to the timber stands of the Long-Bell and Weyerhaeuser interests, Longview was selected as the site for the vast lumber manufacturing plants of these companies. The present output of the Long-Bell plants is 1,800,000 board feet per day. The Weyerhaeuser plants are under construction. Manufacturing plants have also been erected by other concerns, including the Longview Concrete Pipe Company, the Pacific Straw Paper & Board Company, the Magor Car Corporation, the Standard Oil Company, Longview Paint & Varnish Company, and the Central Mill Works. The first unit of the plants of the Longview Fibre Company, to cost 2 1/2 million dollars, is now well under way.'

The circular contained the 'hedge clause' which has already been quoted.

In making the offering, respondent's agent also informed a vice president of petitioner that the bonds were secured by assessments on properties in the City of Longview and as additional security carried the full and complete guarantee of the Long-Bell Lumber Company which was a very large, long established company doing business in the south and west, and that local improvement districts Nos. 11 and 19, against which most of the bonds were issued, were practically co-extensive with the limits of the city.

After reading the circular petitioner's view president requested of respondent's agent additional information about Longview and the property there and about the Long-Bell Lumber Company, which he supplied in a number of documents. One was a booklet issued by the Longview Company, a subsidiary of Long-Bell Lumber Company, engaged in selling Longview real estate. The booklet showed a map on which the mills of Longview Lumber Company, the property of the Weyerhaeuser Timber Company and the City of Longview appeared to extend to and along the northerly side of the Columbia River. The map bore a legend reciting that it 'is intended to show in a general way the relation of the various parts of the city in relation to water, railroad and highway transportation facilities'. Another document was advance proof of an advertisement of the Longview Company, published in the Saturday Evening Post. It contained an illustration of extensive manufacturing plants, beneath which it was stated 'The thoroughly modern electrically operated manufacturing plants shown in the above sketch are in Longview, Wn. They produce 1,800,000 feet of Douglas lumber a day. The buildings cover 72 acres. Six ocean-going freighters can load at one time at the Long-Bell docks'. Another document was a booklet issued by the Longview Chamber of Commerce containing statements from which it could reasonably be inferred that the manufacturing plants of the Long-Bell Lumber Company and the Weyerhaeuser Timber Company were within the City of Longview and that the latter was on the Longview waterfront along the Columbia River.

Still another document, which will presently be discussed, was the published balance sheet for the year ending December 31, 1929, of the Long-Bell Lumber Company. Respondent's sales manager, on May 15, 1930, also wrote to petitioner's vice president a letter offering the first $100,000 of bonds purchased by petitioner saying, 'We believe you have before you practically all the data covering this issue of bonds' and, 'you observe, of course, that this city has no funded debt other than these improvement bonds and that the original debt has been materially reduced through retirement and maturity.'

It is not seriously contended here that petitioner did not purchase the bonds on the faith of the statements which we have detailed and others of similar character, nor is it denied that the Long-Bell, Weyerhaeuser, Longview Fibre and Standard Oil Company plants were all outside the city limits of Longview and that none of those properties were subject to assessments in any of the improvement districts. The mill properties were located between the Columbia River and the limits of the City of Longview. The city never had a frontage of 7 1/4 miles upon the Columbia River and no such frontage at all except for a distance of about 200 yards adjacent to the Longview dock and not within the improvement districts. Substantially all of the land included within the local improvement districts of Longview was also included within a diking district known as Cowlitz County Consolidated Diking District No. 1, which in May, 1930, when the negotiations for the sale of the bonds to petitioner took place, had outstanding bonds in the sum of $2,554,000 payable from the proceeds of special assessments to be levied upon substantially all lands within the improvement districts. Respondent had purchased the entire issue of diking bonds from the Long-Bell Lumber Company in 1925 and later resold them to the public.

At the trial a vice president of respondent, called by petitioner as an adverse witness, testified that in purchasing the local improvement district bonds respondent gave no consideration to the special assessments against Longview real estate; that respondent regarded Long-Bell Lumber Company's guarantee as the sole justification for handling the bonds and would not have handled them without the guarantee. None of these facts detailed by the witness were communicated to petitioner in advance of the sale of the bonds.

A close business relationship had existed between respondent and Long-Bell Lumber Company for some years before 1930. It had purchased from the Lumber Company and sold to customers $25,000,000 of its first mortgage bonds between 1922 and 1926, and in some of its offerings it had been referred to as the 'fiscal agent' of the Long-Bell Lumber Company. In 1926 it had purchased from the Lumber Company and resold $3,250,000 of its bonds. In the years 1925, 1926, and 1927 it purchased from the Lumber Company and later resold more than $3,000,000 of the Longview local improvement district bonds.

The Long-Bell Lumber Company balance-sheet for 1929, to which we have referred, disclosed total assets of more than $116,000,000 with current assets of cash and inventories amounting to more than $15,000,000. Current liabilities were less than $8,000,000 including bank loans of $4,000,000. The funded debt of Long-Bell and all subsidiaries was less than $42,000,000, and capital and surplus were shown in excess of $59,000,000.

There was much evidence from which the jury could have found that the Lumber Company, prior to the first sale of the bonds to petitioner in May, 1930, had, by more or...