Knickerbocker Merchandising Co. v. United States

• Decision Date: 14 July 1926
• Docket Number: No. 404.,404.
• Citation: 13 F.2d 544
• Parties: KNICKERBOCKER MERCHANDISING CO., Inc., et al. v. UNITED STATES.
• Court: U.S. Court of Appeals — Second Circuit

13 F.2d 544 (1926)

KNICKERBOCKER MERCHANDISING CO., Inc., et al. v. UNITED STATES.

No. 404.

Circuit Court of Appeals, Second Circuit.

July 14, 1926.

Hayward & Clark, of New York City (John Holley Clark, Jr., of New York City, of counsel), for plaintiffs in error.

Emory R. Buckner, U. S. Atty., of New York City (David P. Siegel and W. Houston Kenyon, Jr., Asst. U. S. Attys., both of New York City, of counsel), for the United States.

Before MANTON, HAND, and MACK, Circuit Judges.

HAND, Circuit Judge (after stating the facts as above).

The only substantial question in the case is of the insufficiency of the proof. It is perfectly true, as it usually is in such cases, that there was no direct evidence of fraud in the scheme, and unless the circumstances were such as justified a compelling inference that the whole plan at some stage became dishonest, the verdict ought not to have been taken. To decide that question, we must remember what the issues really were.

The relevant representations were promissory, and the substantial fraud depended upon the divergence between the promised performance and the promisor's belief that he could perform. That, however, is quite enough in an indictment under section 215 of the Criminal Code. Durland v. U. S., 161 U. S. 306, 16 S. Ct. 508, 40 L. Ed. 709. That is to say, it is a fraud if the promisor knows that he will not perform, for a promise is an expression of a present intent, and a present intent is a fact. Furthermore, it is not necessary to prove that the promisor intended not to perform; it is enough if he had no intention at all on the matter, or if he had no belief whether or not he could perform, for one cannot intend that which he has no belief in his power to do. Since Lord Herschell's judgment in Derry v. Peek, L. R. 14 App. Cas. 337, it has generally been accepted that, in an action for deceit, the plaintiff must show that the defendant was dishonest. Perhaps it would be truer to say that that case quenched any disposition to diverge from Pasley v. Freeman, 3 Term R. 51, though there have been exceptions — e. g., Scholfield, etc., Co. v. Scholfield, 71 Conn. 1, 40 A. 1046. But all the judges in Derry v. Peek recognized, what had been settled law long before, that although a man might not be charged for his honest beliefs, however imbecile they might be, it was not necessary to show that he disbelieved what he said. Some utterances are in such form as to imply knowledge at first hand, and the utterer may be liable, even though he believes them, if he has no knowledge on the subject. And all unconditional utterances, intended to be taken seriously, imply at least a belief, and, if the utterer does not believe them, they are false, though his mind be quite indeterminate as to their truth. The law in this country is so settled by a great number of precedents, of which some are given in the margin.¹ It is perhaps unfortunate that the phrase "a reckless disregard of truth" has been so often used as the equivalent of an absence of belief, for it adds nothing, as Lord Herschell observed, and has led to some confusion between no belief whatever and unreasonable credulity.

This rule of civil liability we extended in Bentel v. U. S., 13 F.(2d) 327 (decided June 17, 1926), to indictments under section 215 of the Criminal Code, following as we thought the reasoning of Durland v. U. S., 161 U. S. 306, 16 S. Ct. 508, 40 L. Ed. 709, though that case is not a direct authority. We adhere to that ruling, since we see no reason why the fraudulent scheme at which the section aims should not be tested by the same rules recognized in the case of civil wrongs. Indeed, the inclusion of promissory statements appears to us a longer step, if step it be, than to admit absence of belief as a sufficient disparity between fact and utterance.

Therefore it was only necessary in the case at bar for the jury to find that the defendants had no belief that they could perform the promises held out to prospective members. Moreover, it was not necessary for them so to find at the earlier stages of the venture. Of the counts on which conviction was had, the seventh laid a letter of November 7, 1924, and it was enough, if at that time the plan had so clearly miscarried that the incorporators could no longer have believed in its success. It seems to us that the evidence justified that conclusion. The scheme involved an indefinite increase of members, and with it an indefinite income, and, if the dues had been annual, there would have been no reason to suspect the outcome from a failure to make both ends meet between August 1, 1923, and February 1, 1925. But this was not the plan; on the contrary, each member secured permanent service for a single fee. Hence it became necessary, as the members increased, to be prepared to render service to all those whose dues had already been exhausted, as well as to those whose dues were still coming in. So far as the business had gone, the defendants had no reason to suppose that the scheme could be successful; they had completed 2½ years of business with less than nothing in their hands of the dues already received, and were incumbered with the necessity of permanently serving the existing members at terms which involved serious loss. As the new members came in, the expense of serving them would, unless things changed, again consume more than their dues, and nothing would be at hand to support the earlier burdens. Their liabilities, like a snowball, gathered bulk as they proceeded, and nothing was at hand to meet them.

Plainly, if the defendants had reflected at all, it must have been apparent to them that, unless there was a change, they must sooner or later come to an end. Their defense could only rest either in their inability to understand what they had accomplished, or in hopes that some change would occur. The first is scarcely a tenable hypothesis; they were warned early in December, 1924, by the inspectors, and persisted till they could go no further. True, this may be evidence of faith in their eventual success; but it is also evidence that they had not gone till November 7th in ignorance of the facts. And so the question really resolves itself into the good faith of their belief in a change. The natural place to look for that is in their own testimony, for each took the stand in his own behalf.

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