Smith and Feinberg, Circuit Judges, and Levet, District Judge.*fn*
This is an appeal by defendant, Golden Arrow Films, Inc. ("Golden Arrow") from a judgment in the sum of $58,272.71 rendered on April 27, 1970 in favor of plaintiffs by Edmund L. Palmieri, District Judge, Southern District of New York, after a non-jury trial.
The action asserted the following claims: Plaintiffs, as holders of an option to purchase sixteen short-subject children's films, entered into a joint venture contract with the defendant dated August 26, 1966. Plaintiffs obligated themselves to transfer their property interest in seven of the sixteen films to the partnership; defendant agreed to produce, distribute and finance two feature length children's films from the group of short-subject films.
This agreement included among other things:
1. The formation of a partnership to be known as Fairy Tale Production Company;
2. The transfer by plaintiffs to said partnership of all right, title and interest in and to seven short-subject children's films;
3. The production of two feature-length motion pictures employing Edgar Bergen and his puppets;
4. The supervision of the production of such films and financing up to $50,000 per film by defendant (Finding of Fact 7).
Jurisdiction is based upon diversity of citizenship under Title 28 U.S.C. § 1332.
The trial court held that plaintiffs performed each and every obligation required of them but held that defendant failed to perform its obligations in the following respects:
1. Defendant never was in a position to carry out its commitments (353);*fn1
2. Defendant, pursuant to the agreement, obligated itself to pay a certain laboratory, George Humphries Ltd., $6,000 for so-called "interpositives" of the short-subject motion pictures for the purpose of converting their use to color production other than the original "Orwo" color; defendant failed to pay and plaintiff Friedman paid (Finding of Fact 10);
3. Defendant failed to finance the enterprise (Finding of Fact 8).
On October 24, 1967, attorneys for plaintiffs wrote to Golden Arrow as follows:
"We have been instructed by our clients to advise you that they elect to rescind the contract dated August 26, 1966 between Richard Friedman and Albert Fagerberg, on the one hand, and Golden Arrow Films, Inc., on the other. Rescission of the contract is based on fraud of Golden Arrow Films, Inc.
"All transfers of money or other property by Mr. Friedman and Mr. Fagerberg to Golden Arrow Films, Inc. or to the partnership pursuant to the contract of August 26, 1966 are to be deemed to be null and of no effect and all such property shall be considered the property of Mr. Friedman and Mr. Fagerberg as if never conveyed.
"The foregoing is without prejudice to institution of legal action and recovery of full damages for the fraud perpetrated" (Deft.Ex.A; 332).
The district court held that there was no rescission since a "mutual termination" was not executed but that defendant had repudiated the contract and breached the same. On that basis the trial court concluded that plaintiffs had the right to refuse further performance on their part and a right to contract damages.
The Conclusions of Law entered by the trial court held that defendant was liable to plaintiffs on two causes of action: (1) For "wilful" violation of the contract, and (2) "for fraudulently inducing the plaintiffs to believe that it was able and willing to abide by such contract whereas it never had the capacity or intention to do so" (356).
Judge Palmieri decided that plaintiffs were entitled to damages as follows (357):
"(a) $3,960.17, as reimbursement for out-of-pocket disbursements incurred in connection with their contract.
"(b) $6,312.54, as reimbursement for obligations incurred [by defendant] and paid [by plaintiffs] to the British film laboratories, George Humphries & Co., Ltd. and De Lane Lea Processes, Ltd.
"(c) $8,000.00, as compensation for the reasonable value of the time and effort devoted by plaintiff Friedman to the film project between June 1966 and March 21, 1967.
"(d) $40,000 for loss of prospective profits that would have been realized in the joint venture had it not been for the wrongdoing of the defendant."
The judge also noted that "(e) The sale of the non-commercial rights of the component films by plaintiffs for $35,000 and the sale of Magic Bow to McGraw-Hill for $5,000 are deemed to be substantial reimbursement to plaintiffs for cost of the component films. Accordingly the judgment will not include any amount to reimburse plaintiffs for the cost of the component films. The plaintiffs have sufficiently established the cost of these films to be $40,000." The sales referred to were conducted after the alleged wrongful conduct of defendant; it was pursued for purposes of salvaging the thwarted venture and to mitigate damages.
We have concluded as follows: That any finding or conclusion that Golden Arrow was guilty of fraud is unsupported by any finding of fact or by sufficient proof in this record and, hence, requires reversal.
The findings of the trial court (350-356) are not sufficient to clearly establish fraud as required by United States v. Kiefer, 97 U.S.App.D.C. 101, 228 F.2d 448, 449, cert. denied 350 U.S. 933, 76 S. Ct. 305, 100 L. Ed. 815 (1956).
We hold, in substance, that defendant's representation to Friedman and Fagerberg that the latter partners "need not fear spending too much" in the production of the animated films is not sufficient to justify a judgment based upon fraud although defendant was not in a position to provide unlimited finances when it made that statement.
There was no false representation of any material fact, made with knowledge of its falsity and with intent to deceive plaintiffs. See Jo Ann Homes at Bellmore, Inc. v. Dworetz, 25 N.Y.2d ...