Keeler v. Fred T. Ley & Co.

• Decision Date: 23 May 1933
• Docket Number: No. 2766.,2766.
• Parties: KEELER et al. v. FRED T. LEY & CO., Inc.
• Court: U.S. Court of Appeals — First Circuit

65 F.2d 499 (1933)

KEELER et al. v. FRED T. LEY & CO., Inc.

No. 2766.

Circuit Court of Appeals, First Circuit.

May 23, 1933.

Claude B. Cross, of Boston, Mass. (Edward C. Park and Washington, Cross, Proctor & Park, all of Boston, Mass., and John B. Shea, of Springfield, Mass., on the brief), for appellants.

Herbert Parker and Robert G. Dodge, both of Boston, Mass. (Haven Parker, of Boston, Mass., Charles G. Gardner and William V. Baldwin, both of Springfield, Mass., and R. Ammi Cutter, of Boston, Mass., on the brief), for appellee.

Before BINGHAM, WILSON, and MORTON, Circuit Judges.

WILSON, Circuit Judge.

This action is based on deceit. It was first tried before a jury in the District Court of Massachusetts, and a verdict directed for the defendant. On appeal to this court the judgment of the District Court was reversed on the ground that there was evidence of deceit sufficient to go to the jury. 49 F.(2d) 872. It was then sent to an auditor to find the facts, with a stipulation that his findings of facts should be final. On the coming in of the auditor's report making findings that the false representations were made by the defendant as alleged, the plaintiffs filed a motion that judgment be entered for the plaintiffs. The District Court denied the plaintiffs' motion, and ordered judgment for the defendant. Exceptions were taken to the denial of the plaintiffs' motion.

The assignments of error involve the single issue of whether the plaintiffs, as a matter of law, were entitled to recover on the auditor's report.

Certain facts are undisputed: The plaintiffs in 1927 were the owners of a parcel of land located on one of the principal streets in the city of Albany, N. Y. The entire parcel was formerly occupied by a hotel which was burned in 1919.

After the fire the land remained unoccupied. In May, 1926, the plaintiffs executed a lease of the land to the Admiral Hotel Company, which was controlled by Ernest F. Carlson of Springfield, Mass. Carlson, through a corporation, the Ernest F. Carlson Company, also controlled by Carlson, began in 1926 the construction of a hotel on the land of the plaintiffs under lease, and completed the foundation. The Admiral Hotel Company then defaulted the payments due under the lease, and in June, 1927, the plaintiffs on ejectment proceedings again came into full ownership and possession of their land together with the foundations for a building. The Ernest F. Carlson Company, however, filed a mechanics' lien on the property, which was later released on a bond and the lien finally discharged in the New York court.

The plaintiffs then decided that their best course was to sell the land outright, but were willing, if a substantial purchaser could be found, who would erect a building on the foundations constructed by the Carlson Company, to make favorable terms as to payment of the purchase price.

In 1927 Fred T. Ley, then a resident of and with a business office in New York City, a successful builder and contractor, of wide experience in the construction and management of large office buildings, with other offices in Boston, Springfield, Florida, and South America, controlled the defendant corporation, which was organized in Massachusetts and which, under Ley's direction as president and general manager, had for many years been engaged in the construction of large buildings. The financial standing and business reputation of both the defendant and Ley were then of the best.

As a result of the efforts of one Behr, a real estate broker, the plaintiffs and the defendant, through Ley as its president and general manager, in 1927 entered into negotiations for the sale and purchase of the plaintiffs' land and the construction of a building thereon.

After several months of negotiations a contract was entered into, whereby the plaintiffs agreed to sell and the defendant agreed to buy the plaintiffs' land at an agreed price of $1,010,000, of which $140,000 was to be paid in cash, and a purchase-money mortgage in the principal amount of $870,000, subject to a prior mortgage of $850,000, was to be given to secure the bond of the defendant's assignee or nominee, payable in fifteen years. Under the agreement of sale the defendant agreed to erect and complete a five-story office building on the land, to contain 1,200,000 cubic feet of space, and according to plans and specifications to be approved by the plaintiffs, and to begin construction as soon as plans were approved and a loan of $850,000 secured by a first mortgage on the premises was obtained.

It was provided in the contract that the defendant would organize a subsidiary corporation, which would take title to the land and execute the mortgages and carry out the "building loan agreement."

All the provisions of the contract as to construction of the building were finally carried out by the defendant, but the subsidiary company, organized by the defendant, and which was officered by employees of the defendant, as soon as the building was completed, defaulted in the payment of the installments and interest due on the mortgages and in the payment of the taxes for 1928. As a result the plaintiffs were obliged to foreclose the second mortgage, and purchased the equity at a foreclosure sale for the sum of $200,000. At the time of the foreclosure the building was not on a paying basis.

The plaintiffs in their declaration allege that they were induced to enter into this contract by certain false representations made by Ley in their negotiations, viz.: That he assured the plaintiffs that the building the defendant proposed to erect on the premises, according to the plans and specifications to be furnished the plaintiffs, would cost not less than $850,000; that there would be no profit for the defendant in that amount; and that it was the intent of the defendant to operate or manage the building direct or through a subsidiary until it was on a paying basis.

The defendant contends that since none of these alleged statements or promises were contained in the contract, as the contract must be presumed to contain the result of the negotiations, there was no error in awarding judgment for the defendant on the auditor's report.

This court, when the case was before it on the former appeal, 49 F.(2d) 872, laid down certain principles of law which must be held to be the "law of the case," Browne v. Thorn et al. (C. C. A.) 272 F. 950; Beiseker et al. v. Moore (C. C. A.) 174 F. 368; and therefore should have been applied by the District Court, if the facts found by the auditor warranted it: (1) It was not necessary to set forth in the contract the inducing representations that led either party to enter into it; (2) the case is to be governed by the law of New York; (3) fraud may consist in asserting a belief or an opinion when such belief or opinion is not entertained, and the assertion is made in bad faith and with a design to mislead and deceive; (4) that the parol evidence rule has no application to preliminary negotiations in an action for deceit in fraudulently inducing plaintiffs to enter a contract.

These principles are well sustained by the decision both in New York and in the federal courts. Adams v. Gillig, 199 N. Y. 314, 319, 322, 92 N. E. 670, 32 L. R. A. (N. S.) 127, 20 Ann. Cas. 910; Deyo v. Hudson, 225 N. Y. 602, 611, 612, 122 N. E. 635; Arnold v. National Aniline & Chemical Co. (C. C. A.) 20 F.(2d) 364, 56 A. L. R. 4; Rogers v. Virginia-Carolina Chemical Co. (C. C. A.) 149 F. 1-20; Mamaux v. Cape May Real Estate Co. (C. C. A.) 214 F. 757; Milliken-Tomlinson Co. v. American Sugar Ref. Co. (C. C. A.) 9 F.(2d) 809, 815; Vulcan Metals Co., Inc., v. Simmons Mfg. Co. (C. C. A.) 248 F. 853, 856.

In Rogers v. Virginia-Carolina Chemical Co., supra (C. C. A.) page 13 of 149 F., the court said:

"There is a prima facie presumption of fairness and honesty in the dealings of mankind, and, where one man makes a promise to another as an inducement for a change of position or other action on the part of the latter, he, if not expressly, impliedly avers that he has an existing intent to fulfill his promise, and such implied averment of existing intent is of matter of fact and, if false and fraudulent, is a fraudulent representation, which may or may not, according to circumstances, furnish the basis for an action ex delicto."

In Seven Cases v. United States, 239 U. S. 510, 519, 36 S. Ct. 190, 193, 60 L. Ed. 411, L. R. A. 1916D, 164, the court said:

"But state of mind is itself a fact, and may be a material fact, and false and fraudulent representations may be made about it."

Williston, in vol. 3, § 1496, of his work on Contracts, says:

"It is frequently said that a promissory statement cannot be the basis of an action for deceit; and a prediction of future events is at best a statement of opinion. It is undoubtedly true that failure to perform a promise cannot amount to fraud. And in many jurisdictions, without consideration of the question whether a promise was made with an intention not to perform it, it is held that the making of the promise cannot be an actionable fraud. It has been pointed out, however, that when a promise is made with intention not to perform it, the promisor is guilty of misrepresentation. And in a number of cases, generally of recent date, the doctrine seems broadly accepted that a promise which the promisor does not intend to carry out may be a misstatement of material fact."

The auditor found all the facts existed for the application of these well-established rules of law.

At the outset it should be borne in mind, as the auditor found, that the plaintiffs were not interested in contracting merely for the erection of a building on their land, which they would have to operate, but in the sale of their land to a responsible purchaser, which they became satisfied that the defendant would be.

The auditor found from the evidence before him that, at the beginning of the negotiations, Ley, representing the...