Legate v. Maloney

Decision Date13 July 1964
Docket NumberNo. 6287.,6287.
Citation334 F.2d 704
PartiesWilliam H. LEGATE, Claimant, Appellant, v. J. Joseph MALONEY, Jr., Receiver, Appellee.
CourtU.S. Court of Appeals — First Circuit

Mark M. Horblit, Boston, Mass., with whom Samuel H. Kalish and Peter R. Tritsch, Boston, Mass., were on brief, for appellant.

Marcien Jenckes, Boston, Mass., with whom Robert M. Gargill and Charles H. Morin, Boston, Mass., were on brief, for appellee.

Before WOODBURY, Chief Judge, and HARTIGAN and ALDRICH, Circuit Judges.

ALDRICH, Circuit Judge.

This is an appeal from a final judgment of the district court, entered under F.R. Civ.P. 54(b) following a memorandum decision, reported in Securities & Exchange Comm. v. duPont, Homsey & Co., 204 F.Supp. 944, and a further opinion and order confirming, except in one respect, a detailed report of a special master. An earlier appeal was ordered dismissed as premature. Legate v. Maloney, 1 Cir., 1962, 308 F.2d 228, cert. den. 372 U.S. 912, 83 S.Ct. 721, 9 L.Ed.2d 720. The questions arise in a receivership proceeding instituted on the complaint of the Securities and Exchange Commission winding up a brokerage firm, duPont, Homsey & Company, of which one Homsey was the managing partner. The firm was a member of the New York Stock Exchange, hereinafter the Exchange. Legate, the appellant, was, for the final year and a half, a limited partner. A retired small businessman, he had previously been a customer of the firm, and continued to be one. In the receivership proceeding appellant sought to rescind his limited-partnership agreement and to make claims as a creditor in lieu thereof, and to establish certain priorities. Alternatively, he claimed items allegedly due him under the agreement. Conversely, the receiver, appellee herein, sought, by way of counterclaim, to recover withdrawals by appellant from his capital account, allegedly in violation of the agreement. Also involved were various claims and cross-claims on appellant's customer's account by, and against, the receiver and for certain other relief. Finally, appellant sought to establish a claim against the Exchange, which the court declined to hear.

We have considered appellant's many contentions, legal as well as factual, but find only three requiring discussion. And with respect to these, since the evidence has not been reported, we must accept the master's findings and conclusions unless inconsistent or plainly wrong in the light of his subsidiary findings.

Our decision as to appellant's claim of rescission could rest upon either of two grounds. In the first place a limited partnership is wholly statutory. Lancaster v. Choate, 1863, 5 Allen (Mass.) 530. Under Massachusetts law it may be doubted whether even a limited partner may assert equitable rights as against innocent creditors. See Mass.G.L. c. 108A §§ 6(2), 39(a) and (b); c. 109 § 29. For the earlier equity rule see, e. g., Richards v. Todd, 1879, 127 Mass. 167; Perry v. Hale, 1887, 143 Mass. 540, 542, 10 N.E. 174; 1 Rowley, Partnership § 39.0, at p. 753 (2d ed. 1960); Lindley, Partnership 599 (11th ed. Salt & Francis 1950); see also Van Andel v. Smith, 10 Cir., 1957, 248 F.2d 915, 918. One of the incidents of a limited partnership, no less than of a general partnership, is that representations as to capital contributions are made to the creditors of the firm. Cf. Mass.G.L. c. 109 §§ 2, 16, 17 and 23. In the case of Richards v. Todd, supra, on which appellant relies in other particulars, the court carefully restricted the effect of rescission ab initio to "as between the parties," and declared that since the defrauded partner "by holding himself out as a member of the firm rendered himself liable to creditors of such apparent firm," he was entitled to an indemnity. Id., 127 Mass. at 173. None of appellant's cases holds to the contrary.

However, it is not necessary to reach this broad question. Appellant has not shown as plainly wrong the master's conclusory finding that the conduct of Homsey, "insofar as it is a question of fact, does not afford a basis for rescission." Appellant speaks of misrepresentation and concealment. We recognize no relationship here which would condemn concealment, as such, apart from the extent that such concealment might have made any affirmative representations materially false. Nor are we concerned with cases cited by appellant where a party concealed the fact that he was obtaining a secret advantage, and so could be said to have made an implied misrepresentation.

The affirmative representations found by the master were as follows.

1. That the firm was stable and of good reputation, and its standing "impeccable." The master found that "the partnership was not below standard financially."1 He also found that the basis for prior criticisms of the firm's failure to meet certain capital requirements of the Exchange had been attended to and cured. To the extent that any greater standing or repute was implied in the above characterizations, or by the word "impeccable," this would seem a typical example of seller's talk or "puffing." Deming v. Darling, 1889, 148 Mass. 504, 20 N.E. 107, 2 L.R.A. 743, cited with approval in Fogarty v. Van Loan, 1962, 344 Mass. 530, 532, 183 N.E. 2d 111; Boston Consol. Gas Co. v. Folsom, 1921, 237 Mass. 565, 130 N.E. 197.

2. That an investment in the firm would be "safe" and "profitable." This is mere classic "prophecy." Lynch v. Pennsylvania R. R., 1947, 320 Mass. 694, 695, 71 N.E.2d 114; Harris v. Delco Products, Inc., 1940, 305 Mass. 362, 25 N.E.2d 740; Fogarty v. Van Loan, supra.

3. That Homsey was "affluent." Whatever this may mean,2 appellant's evidence to indicate its untruthfulness, that Homsey made expensive personal borrowings from money lenders, established, on the master's findings, nothing which "jeopardized the position of the firm in any way."

4. Finally, the master found that appellant "was impressed by * * * the Exchange's advertising campaign * * * to place faith in the firm" because of its membership. Possibly because the court refused to entertain appellant's attempted claim against the Exchange he failed to introduce evidence of what sort of representations the Exchange made, or, at any rate, failed to bring them to our attention. We cannot, accordingly, consider them for present purposes as having been actionable misrepresentations as distinguished from mere general puffing.

Summarizing, even if appellant's rescission claim is taken at its full value, the only matters that were kept from him related to circumstances which had caused, or in some cases merely had threatened to cause, past violations of certain fiscal requirements of the Exchange. There was no misstatement as to any present violation, or as to existing assets, or, in any substantial matter, as to any firm liability. Nor did these events of which appellant complains reflect upon Homsey's morals or ethics. The debacle came from Homsey's launching into a career of manipulation and embezzlement following appellant's entry into the firm, and was not shown to be connected with any prior event. While, conceivably, he might have found the other way, the master's conclusion that appellant was not materially misled was not plainly wrong.

However, when we come to a charge on Legate's customer's account (as to one item, only) and the master's handling of the receiver's claim that Legate should be held responsible for Homsey's misconduct because of his failure to disclose Homsey's misdoings before matters reached irremediable proportions, we have difficulties.3 In November 1959 Homsey purchased 1000 shares of American Motors. The trading slips were all in Homsey's handwriting, but showed Legate as the purchaser. There is no indication that Legate knew anything of this, and the shares were subsequently paid for by the firm. In January 1960 Homsey purchased 2000 shares of Studebaker-Packard. These, too, were paid for by the firm. On February 11 Legate and Homsey went to Florida to visit some friends of Homsey's. Before departing Homsey told Legate that for procedural reasons he had put "a few shares" of American Motors and Studebaker-Packard in Legate's account. Legate protested, saying that he did not want...

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    ...and Exchange Commission v. duPont, Homsey & Company, 204 F.Supp. 944, 946 (D.Mass.1962), rev'd on other grounds, Legate v. Mahoney, 334 F.2d 704 (1st Cir. 1964), reconsidered, 348 F.2d 164 (1st Cir. 1965); Volpe v. Schlobohm, 614 S.W.2d 615, 618 (Tex.Civ.App.1981); Weltman v. Kaye, 167 Cal.......
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