Irwin v. United States

Decision Date29 December 1964
Docket NumberNo. 19103.,19103.
Citation338 F.2d 770
PartiesNels IRWIN and John F. Kerns, Appellants, v. UNITED STATES of America, Appellee.
CourtU.S. Court of Appeals — Ninth Circuit


William J. D. Lane, Hallam Mathews, Allan M. Carson, Los Angeles, Cal., for appellant Nels Irwin.

Gibson, Hillsinger & Saunders, Lawndale, Cal., Bonaparte & Binder, Hollywood, Cal., for appellant John F. Kerns.

Francis C. Whelan, U. S. Atty., Richard A. Murphy, Asst. U. S. Atty., Chief, Criminal Section, Robert H. Filsinger, Asst. U. S. Atty., Los Angeles, Cal., for appellee.

Before HAMLEY, JERTBERG and BROWNING, Circuit Judges.

HAMLEY, Circuit Judge.

Nels Irwin and John F. Kerns1 were jointly tried before a jury, convicted and sentenced on sixteen counts of an indictment charging mail frauds in violation of 18 U.S.C. § 1341 (1958).2 Each has appealed and the two appeals have been consolidated.

Each count upon which Irwin and Kerns were convicted relates to the mailing of a particular letter to a named individual or company on a specified date, ranging from May 22, 1958 to March 8, 1961. According to the indictment each letter was mailed for the purpose of executing a scheme and artifice to obtain money by defrauding prospective purchasers of work-at-home mail order businesses. As charged in the indictment, the fraud was accomplished by omitting material facts and by making certain material representations which were false and known to be false, upon which representations the prospective purchasers were expected to rely.

The evidence showed that Mail Order Distributors (M.O.D.) was a partnership consisting of Irwin and Citizens National Trust and Savings Bank of Los Angeles as trustee for Irwin's two children. Kerns was general manager of M.O.D. which maintained offices in Los Angeles. The company was in operation from May, 1958, to January, 1961, and by March, 1961, had completely wound up its affairs.

The business of M.O.D. consisted in selling "franchises" and other material to individuals and companies which desired to engage in the business of soliciting, by mail, orders for import items, such orders to be filled by overseas suppliers. In furtherance of this business, M.O.D. placed advertisements in magazines. When inquiries were received in response to these advertisements, solicitation materials were mailed directly to the residences of prospective purchasers. Included in these materials was an application for an "exclusive franchise," generally for the price of $29.95.

After paying this sum, the participant received the franchise and additional materials. Included in these was a manual of instructions and a notice that other materials, including catalogs and mailing lists, would be required, for which there would be a minimum charge of ninety dollars. The mailing lists were obtained by M.O.D. from the William Strole Company, and the catalogs were prepared by M.O.D. based on contacts with foreign suppliers. Upon paying for and receiving these additional materials, the franchise holder would mail out the catalogs to the names contained on the M.O.D. lists. After receiving orders for import items, the franchise holder would send it to the overseas suppliers to be filled. The overseas suppliers were to send the items directly to the purchasers.

M.O.D. averaged about three thousand franchise holders a year during the years it was in operation. The Government produced testimony showing that many franchise holders were able to sell only a few import items under this plan and that their receipts therefrom were far less than their expenses. The small number of orders received was reduced even further since, in many cases, the franchise holders had to make refunds to purchasers because of non-delivery of goods by the foreign suppliers.

Complaints received by M.O.D. from franchise holders sometimes averaged fifteen per day. Franchise holders who sought refunds after the first expenditure of $29.95 were usually told that there could be no refund until the franchise holder had made at least one purchase of the additional materials. Some purchasers were unable to obtain materials for which they had paid until after several prompting letters. Some franchise holders repeatedly asked M.O. D. for advice and assistance but received no reply. A great deal of testimony was received concerning the representations which were made, their falsity, and the reliance placed upon them by prospective participants.

On this appeal Irwin and Kerns first argue that there was insufficient proof of a scheme or plan to defraud. They review certain of the evidence pertaining to the nature of the M.O.D. operation and the representations which were made. They argue therefrom that the franchise holders received value for their expenditures and that the representations were either truthful or of a kind on which prospective participants were not entitled to rely, or that it was not shown that appellants were aware of the falsity of the representations. Kerns argues, independently, that whatever case may have been proved against Irwin, it was not shown by substantial evidence that Kerns knowingly and intentionally participated in any such scheme to defraud or misrepresent.

It was incumbent upon the Government to prove beyond a reasonable doubt, as an essential element of the offense defined in 18 U.S.C., § 1341, that the transactions described in the indictment involved a scheme by Irwin and Kerns to defraud. See Bolen v. United States, 9 Cir., 303 F.2d 870, 874.

The representations referred to in the indictment were concededly made in connection with M.O.D.'s solicitation of business from prospective franchise holders. It follows that if those representations were shown, beyond a reasonable doubt, to have been knowingly false, or that the scheme was reasonably calculated to deceive persons of ordinary prudence and comprehension, Silverman v. United States, 5 Cir., 213 F.2d 405, 407, the Government sustained its burden of proof as to the existence of the requisite scheme.

One kind of statement made by M.O.D. was that the franchises would be profitable.3 There was abundant proof that the mail order business in which franchise holders engaged in strict accordance with the M.O.D. plan, was consistently unprofitable. The materiality of statements of this kind is self-evident since the only reason individuals and companies desired to become participants in the plan was to make a profit.

Appellants, however, argue that they cannot be held responsible with regard to statements of this kind because success depended entirely, at least at the outset, on the results to be obtained by franchise holders from the use of the mailing lists obtained from the William Strole Company. Strole is one of the oldest and best established suppliers of mail order lists. Any failure to obtain returns, appellants contend, rests solely with the lists themselves and not with M.O.D.

But the statements that profits would be realized were in no way conditioned or qualified. Prospective participants were entitled to assume therefrom that use of the lists in the manner specified by M.O.D. would produce profits.

Appellants further argue that statements as to profits which could be realized have to do with future expectations and were therefore not representations of existing fact concerning which the prospective purchasers were entitled to rely. Implicit in any such expression of opinion, however, is the representation of fact that such opinion is honestly entertained. See United States v. Rubenstein, 2 Cir., 166 F.2d 249, 255. The jury was here entitled to find that Irwin and Kerns had no basis in fact for believing that the business to be operated by the franchise holders would be profitable, and that appellants' expressed opinion to that effect was therefore not actually entertained or at least not honestly entertained.

As appellants point out, the impracticability of a scheme is not alone sufficient to convict one of having devised a fraudulent scheme. See Turner v. United States, 8 Cir., 32 F.2d 126, 127. But the statement that a particular venture will succeed is at least a representation that the person making the statement believes that it is practicable. Having no basis for such a belief, Irwin and Kerns misrepresented what their opinion was as to the practicability of the business, or so the jury could have found.

As noted above, Kerns makes the additional argument that whatever case may have been proved against Irwin, it was not shown by substantial evidence that Kerns knowingly and intentionally participated in any such scheme. In this connection it is pointed out that it was Irwin who conceived the idea for the formation of M.O.D., and it was Irwin who prepared M.O.D.'s advertising literature. Kerns argues that with regard to the statements made concerning profits to be realized, the Government offered no evidence that he had any knowledge that the M.O.D. franchises were unprofitable. While conceding that numerous complaints were received, it was not established, Kerns asserts, that these complaints had reference to lack of profits, as distinguished from misprintings, delays in delivery and the like.

The evidence showed that Kerns had been employed by Irwin as general manager of M.O.D. In this position he had control of all operations. All of the materials which contained statements concerning prospective profits, sent to prospective franchise holders, were mailed by persons under his direction and control. Kerns admitted that all of the representations contained in the material were known to him and that he never objected to their inclusion. The representation that, in his honest opinion, the business of franchise holders would be profitable was therefore adopted by Kerns as his own.

Assuming that he did not know that Irwin did not honestly entertain this opinion, and that he had no actual knowledge...

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