Before L. HAND, Chief Judge, and CHASE, and FRANK, Circuit Judges.
This appeal is from a judgment for the plaintiff in a suit to recover damages resulting from the defendant's alleged fraudulent representations and concealments in the sale by the plaintiff of two hundred and four shares of the common stock of Miller Marine Decking, Inc., and of its notes of the face value of $5,000. Diversity jurisdiction is clear and unquestioned.
The above mentioned corporation, which will be called Miller Marine, was organized under the laws of New York and at all material times had its principal office in New York City. Its business, which was the installation of composition deck covering on ships, was largely war born and dependent upon the extent of the government's ship-building activities, but it enjoyed a prosperous business under government contracts during the late war. In 1942, however, it was in poor financial condition though its prospects in view of the war were good.
Early in that year Broffe, the plaintiff, having become acquainted with the situation of Miller Marine called it to the attention of the appellant, Horton, with whom he had been on friendly terms for some years. Both being experienced business men, they considered the question of obtaining control of the corporation and worked out a way to do that upon an investment of $20,000. The corporation had 1200 shares of common stock outstanding all of which were owned by a man named Dale and by Miller, who had developed the formula for the composition decking covering, and by Miller's son. Broffe put in $5000, Horton $5000, and a Baron Von Zuylen $10,000.In part with the $20,000 thus raised the interest of Dale was purchased and he dropped out. Each of the men who advanced the money to make up the $20,000 received five per cent notes of the corporation for the amount of money they put in, Broffe taking two notes, each for $2500, and in addition each got shares of its common stock as a bonus; Broffe and Horton received 204 shares each and Von Zuylen 288 shares. One Waters received 108 shares as a finder's fee and one Andre de St. Phalle received the same number of shares for obtaining the $10,000 from the baron. The Millers retained 288 shares. In 1943, after the other stockholders had been offered a chance to participate in buying Von Zuylen's shares and had declined, Horton paid him $13.92 a share for them.
Meanwhile the business of Miller Marine was conducted until September 1942 with Broffe in charge as president, but in that month he resigned, was elected vice-president, and went to Cambridge, Md., to manage another corporation in which he was interested. Thereafter he took no very active part in the affairs of Miller Marine but continued to draw a salary as vicepresident and was a director of that corporation until July 15, 1944. He knew the corporation was operating under government contracts and doing a good business, but he did not know in detail just what that was and took no pains to find out. When Broffe resigned as president, Horton was elected to that office and continued to hold it until some time in 1946. During that period he was in active charge of the business of Miller Marine.
In April, 1944, Maguire Industries, Inc., made an offer to take over Miller Marine for a total consideration of $60,000. Horton recommended the rejection of the offer and Broffe, to whom the offer was made known, concurred in its rejection. The corporation made a net profit of $12,590 for the year ending June 30, 1943. For the last six months of 1943 its net profit was $32,293. At a meeting of the board of directors on May 17, 1944, which Broffe did not attend, contracts for installations totaling $1,085,709.40 were approved and on June 30, 1944, the corporation had on its books unfinished business aggregating $1,566,165.17, which it completed at the rate of $40,000 to $50,000 a week up to July 19, 1944. Broffe did not receive a copy of the minutes of that meeting but was sent a copy of the corporation's May financial statement. The corporation obtained sizeable contracts during the summer of 1944, which were not entered on its books at once and of which Horton Knew but the other directors did not, and it continued to prosper throughout that year, its net income for the six months ending December 31, 1944, being $112,837.
The foregoing, up to late June 1944, will serve as the background for the fraud which the plaintiff-appellee alleged in his complaint. Those allegations are that the appellant dominated the business policies and affairs of Miller Marine and concealed the amount of its assets and earnings, both actual and anticipated, from the appellee; that in July 1944 and before the 20th of that month the appellant falsely and fraudulently represented to the defendant that one Gerhard Dahl wanted to buy the appellee's Miller Marine stock for the sole reason that obtaining a stock interest would enable him to secure a position with Miller Marine on a salary and that he offered the full value of the stock which the appellee would be well advised to accept; that the appellee believed these representations of the appellant to be true and thereupon sold and delivered his stock to Hayden, Stone & Co., as agents, against the payment of $8,888.93 which was $43.57 a share; that the appellant knew his representations were false and made them intending to deceive and defraud the appellee in breach of the fiduciary relationship existing between the appellee and the appellant as the president, a director, and principal stockholder of Miller Marine; that the appellant fraudulently concealed from the appellee additional business obtained by Miller Marine on "which it was estimated that the Corporation would realize a profit of $700,000.00 or more."
It was also alleged that the appellant fraudulently concealed from the appellee the fact that appellant was before, and at the time, the appellee sold his stock, negotiating for the sale of the stock of Miller Marine at a price greatly in excess of that for which the appellee was induced to sell his stock; that the representation that Dahl was the purchaser of appellee's stock was false and that "in whole or in substantial part" it was in fact purchased by the appellant, or by his wife, or by agents acting in his behalf. And further it was alleged upon information and belief that the appellant continued to negotiate for the sale of Miller Marine stock and that shortly after he had induced the appellee to sell his stock did sell the stock of Miller Marine to the Panhandle Producing & Refining Co., Inc., for $321 per share which was paid to the appellant and others.
The suit was tried by the court on the merits after the appellant had answered the complaint by what amounted to a general denial. The court filed extensive findings which sustained the allegations of fraud only in two respects: (1) That the appellant concealed the true condition of Miller Marine's business from the appellee and (2) that his representation that Dahl was the purchaser of the stock was false.
What the court found, on adequate evidence, in respect to the elements of fraud on which he entered the judgment from which this appeal was taken is substantially as follows.
Dahl was a long standing friend of both Broffe and Horton. He was thought to be a man of means and the appellant had at one time been employed by him. Late in June or early in July, 1944, Dahl told Horton that he needed more income and inquired whether he could have a salaried position with Miller Marine. Horton told him he could if he were willing to buy some stock. Dahl expressed his willingness to do that.
Horton knew Broffe had, in February, said he wanted to sell his stock, and while Dahl was present, Horton called Broffe by telephone at Cambridge, Md., and told him Dahl wanted a position on a salary with Miller Marine and would like to buy his stock in order to get one. Broffe said he was interested in selling his stock and his notes and named prices for them. He asked Horton what the stock was worth but Horton declined to state his opinion and referred him to the corporation's financial statement of May 31st. In a second telephone conversation Broffe told Horton he would take $15,000 for his stock and notes. Horton told Dahl of this offer to sell and Dahl then said he would pay $14,000 for them. Horton communicated this offer to Broffe on or before July 12th in a third telephone call and it was accepted, $8,888.93 being the price of the stock and $5,111.07 that of the notes.
On July 12, 1944, Broffe mailed Horton a letter in which he enclosed the notes and the stock certificate endorsed in blank, saying that he "did not fill in Gerry's name as I was not sure exactly how he wanted it transferred." After saying that he would like two checks, one for the notes and one for the stock, and that he understood that the sale would be consummated by July 15th, he added, ...