Mandelbaum v. Goodyear Tire & Rubber Co.

• Citation: 6 F.2d 818
• Decision Date: 30 May 1925
• Docket Number: No. 6818.,6818.
• Parties: MANDELBAUM v. GOODYEAR TIRE & RUBBER CO. et al.
• Court: U.S. Court of Appeals — Eighth Circuit

6 F.2d 818 (1925)

MANDELBAUM v. GOODYEAR TIRE & RUBBER CO. et al.

No. 6818.

Circuit Court of Appeals, Eighth Circuit.

May 30, 1925.

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Howard L. Bump and John N. Hughes, both of Des Moines, Iowa, for plaintiff in error.

Vincent Starzinger and F. W. Lehmann, Jr., both of Des Moines, Iowa, for defendants in error.

Before LEWIS, Circuit Judge, and VAN VALKENBURGH and FARIS, District Judges.

VAN VALKENBURGH, District Judge (after stating the facts as above).

It should be kept in mind at the outset that this case involves no sporadic case of stock-jobbing by a concern conceived and organized for that specific purpose without substantial business foundation. The Goodyear Tire & Rubber Company is one of perhaps four large corporations of similar character which have been developed in connection with the phenomenal growth of the automobile industry. At the time of the transaction here involved it had been in business for 22 years, and was known throughout the United States and abroad as a business concern of great magnitude. It had then and still has assets running high into the millions. Its sales were and are tremendous in volume. Its business activities are complex and far-reaching, territorially and otherwise, and its standing in the business world has been such as to enlist credit from conservative financial sources far beyond the ordinary range. All these conceded facts must be accorded their proper weight in determining whether in the present instance this defendant has departed from a course of fair dealing and has committed the fraud charged in the complaint.

Now, as to the misrepresentations alleged, if the plaintiff in error fails to sustain its allegations in this respect, his case must fail, even though his investment turned out to be an unfortunate one. This court has held, following the established rule, that: "Representations, to constitute sufficient basis for an action of deceit, must be fact statements, must be untrue, and known to be untrue, or else recklessly made, must be made with intent to deceive, and for the purpose of inducing the other party to act, and the other party must rely thereon, and be induced thereby to act to his injury." Pain v. Kiel et al. (C. C. A.) 288 F. 527, 529.

It is first charged that, in making up the prospectus of assets, real estate, buildings, machinery, and equipment, the real estate and buildings were appreciated $5,000,000, making the total $47,898,160.38. It appears that prior to April 30, 1920, these items were carried on the books of the company at $42,898,160.38. Plaintiff in error claims that this increase by $5,000,000 was fraudulent. The only evidence upon the subject comes from officers and others connected with the defendant company. They state that these items were always carried at a very low figure, and that the highest allowable percentage of depreciation was applied; further, that many items of reconstruction were treated as repairs and carried under operating expenses; that other items, which were tangible and proper to be included, had been ignored in bookkeeping. It appears, without attempt at concealment, that this property had been carried at the lowest permissible figure to accomplish a saving in taxes. Whatever may be the fact about this, it was incumbent upon plaintiff in error to establish by the proofs that the property in question was of a value less than that represented. All the testimony in the case is to the contrary. Any doubt which might arise from the bookkeeping addition made is dissipated by the report of the accountants for the bankers, upon which plaintiff in error seeks to rely, bearing date October 31, 1920. The value there shown corresponds almost exactly with the value stated in the prospectus, and at that date it is conceded that the affairs of defendant in error were at their lowest ebb.

It is next charged that, under the heading "Securities Owned," the investment in the Goodyear Tire & Rubber Company in Canada was carried at $4,061,980.48, when the actual cash investment therein was but $682,980.48. It was shown in testimony, without contradiction, that the amount added to the cash investment was a stock dividend which had been issued to the parent company, defendant in error, out of earnings of the Canada subsidiary. There was no showing that this subsidiary had not made the earning from which this dividend was declared. In the absence of such dividend the parent company might have drawn down this sum in cash. It left the money with the subsidiary, taking stock in lieu thereof. Under such circumstances it cannot be said that its representation in this particular was false, within the definition attaching to actionable fraudulent representations.

It is next urged that the prospectus failed to disclose that the company had built a club house for the use of its employees at a cost of $1,500,000. The weight of the testimony is that this club house was built prior to 1920. It was built for the purpose of providing greater facilities for the company's employees. It was regarded by it as a good investment. We do not think that the failure to discuss this item in its prospectus could be regarded as a concealment of the company's condition amounting to fraud. As well might it be contended that it was the duty of the Goodyear Company to disclose in its prospectus its entire previous course of business, in order that it might be judged whether its management had been judicious and free from criticism.

The fourth specification is that the prospectus failed to disclose that the president of the company, F. A. Seiberling, was indebted to the company for more than $3,500,000, and that other large sums had been loaned to other officers of the company. This item was carried under the head of "Sundry Debtors." But little is contained in the record with respect to loans to other officers of the company; the principal emphasis being laid upon the Seiberling item. At the outset it may be stated that no evidence was introduced, nor substantial claim made, that these officers were not fully able to meet their obligations to the company; the inferential claim being that loans to officers are improper per se, and, if made, should have been disclosed on the face of the prospectus. We find in this contention no support for the charge of fraudulent concealment. Mr. Seiberling was placed upon the stand as a witness for plaintiff in error. He was the president and one of the founders of the corporation. He explained that he had a running account with the company, which consisted largely of company property taken and held in his name for business convenience; this included real estate, patents, and, perhaps, other items; that sometimes the balance would be in his favor, and sometimes in favor of the company; that the charge against him upon the books of the company did not at any time represent his personal obligation, except in part. This statement is corroborated in parts of the evidence tendered by plaintiff in error. From such, it appears that the account of Seiberling was closed by the company taking over the Goodyear Athletic Field, containing 30 acres, and one-half ownership of the Akron, Canton & Youngstown Railway Company, represented by $7,500,000 par value of the stock, which properties were stated to have been acquired for the benefit of the Goodyear Company and were essential to the proper conduct of its business. Thus considered, the transaction presents no element of fraud as disclosed by this record.

The fifth specification is that plaintiff in error subscribed for original stock, and that the defendants went upon the market and bought stock and delivered it to him, instead of the original capital stock. This charge finds no support in the record.

The next charge is that it was represented in the prospectus that, after declaring a common stock dividend of 150 per cent., the company had a surplus belonging to common stockholders of more than $12,000,000; that when the stock was sold to plaintiff the company failed to disclose that it had outstanding, not included as liabilities in its financial statements, large amounts of contracts for raw materials, known as "commitments," on which the price was then declining, and...