Funding Systems Leasing Corp. v. Pugh, 74--3823

• Decision Date: 19 April 1976
• Docket Number: No. 74--3823,74--3823
• Parties: FUNDING SYSTEMS LEASING CORPORATION, Plaintiff-Appellee, v. Garland B. PUGH, Sr., Individually and d/b/a Georgia Tractor and Equipment Company, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 91

530 F.2d 91

FUNDING SYSTEMS LEASING CORPORATION, Plaintiff-Appellee, v. Garland B. PUGH, Sr., Individually and d/b/a Georgia Tractor and Equipment Company, Defendant-Appellant.

No. 74--3823.

United States Court of Appeals Fifth Circuit.

April 19, 1976.

Fred H. Hodges, Jr., Macon, Ga., for defendant-appellant.

J. Timothy White, Atlanta, Ga., for plaintiff-appellee.

Appeal from the United States District Court for the Middle District of Georgia.

Before BROWN, Chief Judge, and THORNBERRY, Circuit Judge, and MILLER ^* Associate Judge.

THORNBERRY, Circuit Judge:

Plaintiff Funding Systems Leasing Corporation commenced this Georgia diversity action for deceit ¹ against Garland B. Pugh, individually and doing business as Georgia Tractor & Equipment Company, to recover damages arising out of the default of E. F. Anderson & Son, Inc., on a logging equipment lease. The district court, sitting without a jury, found for Funding Systems and assessed damages against Pugh. On appeal Pugh challenges (1) two crucial findings by the district court, (2) the failure of the district court to apply Ga.Code Ann. § 105--303, and (3) the formula used to measure damages. For the following reasons, we affirm the judgment of the district court.

Appellant Pugh was a creditor of financially troubled E. F. Anderson & Son, which operated a pulpwood and timber business in Barnesville, Georgia. To help E. F. Anderson & Son in obtaining needed working capital, Pugh assigned a promissory note, signed by E. F. Anderson and his son and payable to Georgia Tractor & Equipment Company, to a Georgia bank. In return, Pugh acquired proxy control of all the outstanding stock of E. F. Anderson & Son. After this transaction, all records of E. F. Anderson & Son were kept in Pugh's Byron, Georgia, office, some fifty miles from the site of E. F. Anderson & Son's operations in Barnesville. A bookkeeper, hired by Pugh and paid equally by Pugh and E. F. Anderson & Son, maintained the latter's books at Pugh's office. Approximately six months after Pugh gained proxy control, E. F. Anderson approached Pugh with the idea of purchasing additional logging equipment from Pugh's company. At about the same time, a representative of Funding Systems conferred with Pugh about purchasing equipment, which would in turn be leased by Funding Systems to a third party immediately after purchase. Funding Systems's usual method of operation was to locate a potential lessee of equipment, make firm arrangements for a lease, and at that point purchase the equipment contemplated in the lease. Without disclosing his relationship to E. F. Anderson & Son, Pugh suggested the company as a possible lessee of logging equipment. The district court found--and appellant Pugh challenges this finding--that Pugh prepared a misleading and fraudulent financial statement concerning E. F. Anderson & Son. The erroneous financial statement was hand-delivered by Pugh to representatives of Funding Systems and was relied on by Funding Systems in accepting E. F. Anderson & Son as a lessee. With the exception of a down payment, E. F. Anderson & Son completely defaulted on the lease and went into bankruptcy. The district court found, and appellant concedes, that the logging equipment was sold to Funding Systems at a price substantially above that suggested by the manufacturer of the equipment. Damages were assessed against Pugh in an amount equal to the difference between the manufacturer's suggested selling price for the logging equipment and the price at which Pugh in fact sold the equipment to Funding Systems. See Record on Appeal, Vol. I, at 66--68. The determination of liability hinged on the district court's finding that Pugh prepared the misleading financial statement and that Funding Systems exercised due diligence in its dealings with Pugh and E. F. Anderson & Son. As with the finding that he was primarily responsible for the preparation of the financial statement, Pugh also challenges the determination that Funding Systems exercised due diligence. Finally, the district court held that Pugh was under no duty to disclose his proxy relationship with E. F. Anderson & Son to Funding Systems, and the latter has not cross-appealed that holding.

I.

We turn first to the district court's finding that Pugh was primarily responsible for the preparation of the misleading financial statement. The district court focused on three factors that inculpated Pugh. First, Pugh handled all the negotiations leading up to the purchase of the equipment and its leasing to E. F. Anderson & Son, and it was not until the details of the transaction had been fully agreed upon by Pugh and Funding Systems that the latter directly contacted E. F. Anderson & Son. As an indication of the control Pugh exercised, plaintiff stressed the hand-delivery of the financial statement, which was accompanied by a cover letter signed by Pugh. Second, the district court properly found that the bookkeeper mentioned above, who actually prepared the financial statement from records maintained in Pugh's office, was 'employed' by Pugh. See Record on Appeal, Vol. I, at 64. Third, Pugh demonstrated a familiarity with the affairs of E. F. Anderson & Son that would have made possible his preparation of the misleading financial statement. The district court's finding that Pugh was primarily responsible for preparation of the misleading financial statement is measured by the standard of clear error. See Fed.R.Civ.P. 52(a); Guardian Life Insurance Co. v. Eagle,484 F.2d 382 (5 Cir. 1973); Baggett v. Richardson, 473 F.2d 863 (5th Cir. 1973). From our examination of the testimony given and the evidence introduced at trial, we cannot say that the district court's finding was clearly erroneous.

Appellant next challenges the district court's determination that Funding Systems exercised due diligence in its handling of the purchase and lease transaction. Under Georgia statutory law, the complaining party in a suit for deceit cannot prevail if by the exercise of due diligence he could have obtained knowledge of the truth. See Ga.Code Ann. §§ 37--211, 37--212. The standard is one of reasonable diligence, and the defrauded party is 'not bound to exhaust all means at his command to ascertain the truth before relying upon the representations.' Dorsey v. Green, 202 Ga. 655, 44 S.E.2d 377, 380 (1947); see Lariscy v. Hill, 117 Ga.App. 152, 159 S.E.2d 443 (1968); Blanchard v. West, 115 Ga.App. 814, 156 S.E.2d 164 (1967). Careful consideration of the information contained in the financial statement should be all that was required in the instant commercial transaction. The function of a financial statement is to provide reliable and essential information for an expeditious, but considered, business decision. The prevalent use of financial statements is testimony to the faith placed in them by the business community. In any event, the evidence at trial disclosed that Funding Systems did investigate the information in the financial statement, inquiring with two Georgia banks on the credit status of E. F. Anderson & Son. See Record on Appeal, Vol. I, at 61. The determination by the district court of due diligence on the part of Funding Systems, which upon close analysis is a mixed question of law and fact, is subject to appellate review under the clearly erroneous standard. See Nelson v. Jacksonville Shipyards, Inc., 440 F.2d 668 (5 Cir. 1971); Bethlehem Steel Corp. v. Yates, 438 F.2d 798 (5 Cir. 1971); McAllister v. United States, 348 U.S. 19, 75 S.Ct. 6, 99 L.Ed. 20 (1954); 9 C. Wright & A. Miller, Federal Practice and Procedure § 2590, at 760--66 (1971). But cf. Mamiye Brothers v. Barber S.S. Lines, Inc., 360 F.2d 774, 776--78 (2 Cir.), cert. denied, 385 U.S. 835, 87 S.Ct. 80, 17 L.Ed.2d 70 (1966). We hold that the district court's finding that Funding Systems exercised due diligence was not clearly erroneous.

II.

Appellant argues in this court, on the basis of Ga.Code Ann. § 105--303, that even if the district court's determination that appellant prepared and furnished the misleading financial statement was not clearly erroneous, appellant could still not be held legally accountable for the contents of the statement. See Brief for Appellant at 13. Section 105--303 provides that (n)o action shall be maintained for deceit in representation to obtain credit for another, unless such misrepresentation is in writing, signed by the party charged therewith.

It is appellant's theory that his signature on the cover letter attached to the financial statement was insufficient to satisfy the signature requirement of section 105--303. Funding Systems responds that appellant failed to raise this argument properly in the district court and is, thereby, precluded from making the argument on appeal. An examination of the record discloses that appellant did not affirmatively plead section 105--303 in his answer. See Record on Appeal, Vol. I, at 15--18. Moreover, the statute's applicability is not discussed in the district court's pre-trial order, which is signed by the court and the parties and purports to be an all-inclusive statement of the issues presented for consideration. ² The only reference to section 105--303 that we have been able to discover in the record is a brief discussion of the statute in appellant's memorandum in support of his motion for summary judgment, which was requested by appellant and denied by the district court after the entry of the pre-trial order. See id. at 42. Section 105--303 was not argued by counsel for appellant in either his opening or closing remarks to the district court, both of which occurred after the ruling on the motion for summary judgment. See id., Vol. II, at 4--6, 313--30. Not surprisingly, the opinion of the district court does not make any findings of fact or draw any conclusions of law relative to the application of section 105--303, and in fact does not even mention the statute in passing. See id., Vol. I, at 59--68....