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Smith v. Bear

September 4, 1956

DELANCEY C. SMITH, PLAINTIFF-APPELLANT,
v.
JOSEPH AINSLIE BEAR, HAROLD C. MAYER, V. THEODORE LOW, SALIM L. LEWIS, DAVID FINKLE, DONALD C. LILLIS, LEONARD DICKSON AND ROBERT B. STEARNS, INDIVIDUALLY AND AS CO-PARTNERS DOING BUSINESS UNDER THE FIRM NAME AND STYLE OF BEAR, STEARNS & CO., DEFENDANTS-APPELLEES.



Author: Waterman

Before MEDINA, HINCKS and WATERMAN, Circuit Judges.

WATERMAN, Circuit Judge.

The action here was brought on January 10, 1950 in the U.S. District Court for the Southern District of New York, by DeLancey C. Smith, a resident of California, against eight defendants, as individuals and as co-partners of the New York City brokerage firm of Bear, Stearns & Co. Smith sued as assignee of the claims of F.E. Hesthal Co., Inc., a California corporation of which he was president, and as assignee of the claims of one Curtis Day, also a resident of California. The complaint seeks damages on four causes of action: two for breach of alleged oral contracts, and two for alleged breach of duties owed plaintiff's assignors under the federal securities laws.

In the first two causes of action, plaintiff alleged and sought to prove that, in January 1946, defendant Bear, Stearns & Co. through Livingstone & Co., a California corporation in the general investment business, with offices in San Francisco and Los Angeles, entered into certain oral agreements with each of plaintiff's assignors. The third and fourth causes of action arose out of the same transactions as the first two.

The case was tried to a jury which returned a special verdict in favor of the defendants upon written questions submitted to it by the trial judge. From a judgment entered on the verdict for the defendant, plaintiff appeals alleging various errors were committed to his prejudice during the trial. Upon the view we take of this case, it will be necessary for us to consider only two of these alleged errors. (1) As to the first and second causes of action, plaintiff took exception to the trial court's charge instructing the jury to disregard any evidence of the alleged oral contracts. The trial court ruled as a matter of law that these alleged oral contracts were inconsistent with written agreements entered into with Livingstone & Co. by plaintiff's assignors. (2) As to the third and fourth causes of action, plaintiff took exception to the trial court's exclusion from evidence of certain memoranda supposedly bearing on the question whether Bear, Stearns & Co. induced certain wrongful acts of Livingstone & Co.

At all times material to this controversy plaintiff's assignors dealt with Livingstone & Co., and at no time did they ever deal directly with Bear, Stearns & Co. Livingstone & Co. was a newly formed corporation in the general investment business in California. The president of Livingstone & Co. was a close friend of several of the partners of Bear, Stearns & Co. and two-thirds of the capital for Livingstone & Co. was provided by the wives and relatives of the partners of Bear, Stearns & Co. Bear, Stearns & Co. maintained and paid for a direct wire from their offices in New York City to Livingstone & Co.'s offices in San Francisco. On the other hand there was uncontradicted testimony that neither the partners of Bear, Stearns & Co. nor their wives and relatives ever interfered with the management of Livingstone & Co.; that on the contrary, the management of Livingstone & Co. was exclusively in the hands of its president, Livingstone, and that Bear, Stearns & Co. customarily paid for direct wires to its out-of-town correspondents.

Plaintiff claimed that under alleged oral agreements with defendants, plaintiff's assignors bought and sold securities in so-called arbitrage transactions. These arbitrages involved the purchase on the one hand of certain bonds (hereinafter called the "old bonds") of the St. Louis-San Francisco Railway Co., then in re-organization, and the simultaneous short sale at a price greater than the purchase price of the "old bonds" of the securities (hereinafter called the "when issued securities") which would be received when the re-organization was consummated. The difference in the purchase price of the old bonds and the sales price of the when issued securities was "locked-in profit." The only way plaintiff's assignors believed they could lose on the transaction would be if the re-organization should fail to go through as planned. Livingstone, the president of Livingstone & Co., orally agreed, according to plaintiff's version of the case, that plaintiff's assignors need pay only 20 per cent of the cost of the old bonds; that Livingstone & Co. would finance the balance of the purchase price at 1 per cent interest; and that plaintiff's assignors would never be required to pay anything more toward their purchase price.

The alleged oral agreements were inconsistent with the express terms of written agreements signed by plaintiff's assignors at the time they entered into the transactions. In these agreements plaintiff's assignors promised that if Livingstone & Co. should demand more margin on the old bonds in the future, funds would be furnished as required.

After the 20 per cent of cost was put up and the bonds were purchased, their market price fell; and Livingstone & Co., under pressure from the Bank of Manhattan with which it had financed the transactions, demanded more margin from time to time from its customers as the market prices continued to fall. At first, both Hesthal & Co. and Day met these demands for additional margin and did so without filing any written protests. Eventually, Day, unable to meet the increased margin requirements, was sold out at a direct loss to him of $44,476.88. He also failed to realize an expected profit of $33,357.79. Hesthal & Co., however, in September, 1946 undid the arbitrage. It borrowed funds for this purpose from the Guaranty Trust Co. of New York City, and thus met the balance due on the cost price of the old bonds, and covered the short sale of the when issued securities. It held the old bonds until the reorganization actually took place as planned in January, 1947. The old bonds continued to fall in price. Finally Hesthal & Co. suffered a net loss on its investment of $71,872.09 plus $4,800.55 interest paid on the Guaranty Trust loan. Hesthal also failed to realize an expected profit on the arbitrage transaction, which in its case would have been $44,239.22. It is for the foregoing alleged damages that plaintiff brings this suit.

The trial court instructed the jury with reference to the law applicable to the first two causes of action based upon the alleged oral agreements:

"It is the duty of the judge to interpret the meaning of a written instrument. I instruct you as a matter of law that the written agreements entered into between Livingstone & Co. and Hesthal & Co. and Day, respectively, were agreements that if Livingstone & Co. required further payments to be made to secure the balance due on the purchase of the securities, Livingstone & Co. had a right to demand such payments and Hesthal & Co. and Day, respectively, had an obligation to make them, and in the event that they were not made, Livingstone & Co. had a legal right to sell out the securities then standing in the account of these customers. We thus have causes of action based upon alleged oral agreements which are inconsistent with the written agreements. * * *

"If they were firm contracts that no more than 20 per cent margin would ever be required, then when thereafter or simultaneously therewith Smith and Day entered into written agreements recognizing that Livingstone & Co. could call for more margin, the oral contracts were no longer binding. The written contracts would supersede the oral statements. * * * As a matter of law, the written agreement providing that Livingstone & Co. could call for more margin supersedes all negotiations or oral stipulations concerning this matter which preceded or accompanied the execution of this written agreement, and the written agreement to the extent that it is contradictory of the oral statements made before or at the time of the execution of this written agreement, supersedes all of the oral statements."*fn1

The trial court thus invoked the so-called parol evidence rule. This rule is actually not a rule of evidence, but a rule of substantive law. In re Gaines' Estate, 1940, 15 Cal.2d 255, 100 P.2d 1055; Higgs v. De Maziroff, 1934, 263 N.Y. 473, 189 N.E. 555, 92 A.L.R. 807. Both parties therefore correctly concede that California law is controlling. Wootton Hotel v. Northern Assurance Co., 3 Cir., 1945, 155 F.2d 988.

Under California law*fn2, in the absence of fraud, mistake or accident, clear and unambiguous words of a written agreement cannot be varied by oral testimony. California Canning Peach Growers v. Williams, 1938, 11 Cal.2d 221, 78 P.2d 1154; Parker v. Meneley, 1951, 106 Cal.App.2d 391, 235 P.2d 101. Contemporaneous or prior oral negotiations are regarded as merged into the writing and cannot vary or contradict the terms of the written agreement. Hale v. Bohannon, 38 Cal.2d 458, 241 P.2d 4; Wenban Estate, Inc., v. Hewlett, 1924, 193 Cal. 675, 227 P. 723. See Wigmore, Evidence (3rd ed. 1940), ยง 2425. Therefore, "Such evidence, though admitted without objection, must be ignored as of no legal import and its incompetency to vary a written contract is a matter of law." Lifton v. Harshman, 1947, 80 Cal.App.2d 422, 433, 182 P.2d 222, 228.

The written agreements signed by plaintiff's assignors were of the type that customers normally sign with brokers. The written agreements with each of plaintiff's assignors were identical and provided in part that "the customer agrees upon demand, to deposit any additional margin required by the broker, and in case of his failure to do so * * the broker shall have the right to close the account * * * or to sell any securities therein * * *"

When more margin was required, it was on the basis of these agreements that Livingstone & Co. demanded more margin; plaintiff's assignors acquiesced in the demands and paid more margin from time to time; and Livingstone & Co. finally sold out ...


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