Appeal from an order of the United States District Court for the Southern District of New York, Hon. Marvin E. Frankel, J., dismissing the claims against defendant and third-party defendants-appellees.
Mulligan, Oakes and Meskill, Circuit Judges.
This is an appeal from an order of the United States District Court, Southern District of New York, Hon. Marvin E. Frankel, J., entered on November 6, 1974, which dismissed the claims of plaintiff Peerless Mills, Inc. (Peerless) against defendant American Telephone & Telegraph Company (AT&T) and the claims against third-party defendants Hertz, Warner & Co. (HW&Co), Irving Hertz (Hertz), and Henry Warner (Warner). We affirm the judgment.
In 1963 third party defendant Paul Cohn, aged 23 at the time, became a founding partner in the securities brokerage firm of Hertz, Neumark & Warner, the predecessor of HW&Co, a limited partnership and a member firm of the New York Stock Exchange (NYSE). Cohn withdrew as a partner from the predecessor firm in 1965 but remained as an employee of that firm and its successor HW&Co. In 1968 Cohn married the daughter of A.C. Fine who was then the President and sole stockholder of Peerless. Cohn became increasingly active in the syndication department of HW&Co and was earning about $33,000 per annum by the fall of 1968. In the spring of 1969 he indicated to third-party defendant Warner his interest in once more becoming a general partner in the firm. Judge Frankel found that Cohn knew that the first six months of the firm's fiscal year beginning July 1, 1968 were very profitable, with earnings of about $1,000,000. However, he was not advised by either Hertz or Warner, and did not know, that the early months of 1969 were showing substantial losses, so that eventually the year's losses would practically wipe out the earnings of the first half. The court below found as a fact that there was no intention on the part of the third-party defendants to mislead Cohn and that they were entitled to assume that Cohn would observe the changing conditions of the industry and the "profound revisions in the structure and character of the [securities] business." As a condition of becoming a partner, Cohn was told in March or April, 1969 that his annual salary would be $15,000 and that his participation would be three per cent of the firm's profits, and four-and-one-half per cent of its losses. He was also advised that he would be expected to make a capital contribution of $100,000. Hertz and Warner were aware that Cohn would probably be borrowing for this purpose from his in-laws the Fines. In October, 1969 Cohn obtained a loan from Peerless of 2,000 shares of stock of the defendant AT&T. In connection with the loan Peerless executed a securities loan agreement which released HW&Co from any liability to Peerless. On November 19, 1969 the 2,000 shares of AT&T stock delivered by Peerless were registered in the name of HW&Co. Although the partnership year ran from July 1, 1969, Cohn did not actually sign the partnership agreement until late November or early December 1969, but it was effective as of July 1, 1969. The HW&Co statement for fiscal 1969 was published in late December, 1969, disclosing the losses of the firm. Shortages in the capital accounts of some of the partners also became known and the romance between Cohn and HW&Co came to an end. In February, 1970 Cohn and another young partner, Joel Held, consulted counsel to explore the possibility that they had been fraudulently induced to enter the firm. On May 1, 1970, with the assistance of another partner, Robert Sadlier, Cohn caused the transfer of twenty 100-share certificates of AT&T stock held by HW&Co into a 2,000 share certificate (No. 0471-0429) in the name of Peerless. These were not the same shares loaned by Peerless to Cohn which in fact had been previously disposed of by HW&Co on the open market on January 30, 1970. No member of HW&Co had authorized the transfer secretly effected by Sadlier and Cohn. After Cohn had consulted new counsel, Peerless advised AT&T on July 6, 1970 that it wanted a "stop transfer" order placed on the substituted 2,000 share certificate now held in its name through the machinations of Cohn and Sadlier. The order was recorded on the books of AT&T on that day. The next month after having learned of the transfer to Peerless, Hertz demanded that Cohn arrange for the transfer of the shares back to the firm. Cohn refused and thereafter was suspended as a partner of HW&Co. On September 15, 1970 HW&Co requested AT&T that the 2,000 share certificate, which had remained in its office, be transferred from Peerless to HW&Co. AT&T made the transfer and issued a new certificate to HW&Co. Pursuant to its request HW&Co represented that Peerless had no interest in the securities and agreed to indemnify AT&T against any loss resulting from the transfer. When Peerless later protested, AT&T initially took the position that a mistake had been made. AT&T ultimately concluded, however, that Peerless was not the rightful owner and that none of its rights had been violated by AT&T.
Peerless then instituted this action against AT&T by filing its complaint on March 1, 1971, praying for a judgment directing AT&T to issue a certificate of 2,000 shares of AT&T stock to Peerless, plus all accrued dividends with interest. AT&T in turn impleaded HW&Co and its general partners, including Cohn. In an amended complaint filed on July 23, 1971 Peerless also asserted claims against HW&Co, Hertz and Warner. Peerless urged essentially that Cohn had never become a partner of HW&Co, which had thus converted the Peerless shares loaned to Cohn; that the defendants had made a false representation as to the firm's status to Cohn and through Cohn to Peerless and that Peerless would not have loaned the stock but for the false representations. The action was tried before Judge Frankel without a jury. He made extensive findings of fact and conclusions of law filed on October 31, 1974, and the judgment appealed from dismissed both complaints against AT&T as well as the third-party complaint. (A counterclaim by HW&Co and Hertz and Warner was also dismissed but no appeal has been taken from that dismissal).
On this appeal Peerless urges that the District Court was in error in holding that Cohn was a partner of HW&Co as a matter of law, and therefore is holding that the AT&T stock transferred as a loan to Cohn was not converted. Appellant argues that since at least nineteen intended partners did not sign the proposed July 1, 1969 partnership agreement, including the so-called Meyer-Blau group which represented approximately $1.7 million in capital to HW&Co and which was to assume eighteen per cent of the losses, no partnership was created. The difficulty with this position is that there is no evidence which would indicate that Cohn ever made it a condition to his becoming a partner that the Meyer-Blau group or anyone else would also become partners. On the contrary on his cross-examination below Cohn admitted that the question of Meyer and Blau signing the contract was not on his mind. Judge Frankel found as a fact
That they [the Meyer-Blau group] would surely sign was not "represented" to Cohn or insisted upon by him as an essential preliminary to his membership. Whether the Meyer-Blau group would be in or out was, as Cohn testified, "not a question in [his] mind" when he made his capital contribution, having effectively been a partner for some five or six months before.
Appellant next contends that Cohn did not become a partner because the partnership agreement was not filed with the NYSE pursuant to its Rule 313, nor was there compliance with New York Partnership Law §§ 91 (1)(a) and 91 (1)(b) which require as a condition to the creation of a limited partnership that a certificate containing pertinent information must be signed and acknowledged and must be filed in the office of the appropriate County Clerk. Whatever effect the conceded failure of HW&Co to comply with these filing provisions may have with respect to the firm's relationship to the NYSE or to third parties is not before us. We note that Cohn's status as a partner is now in arbitration proceedings before the NYSE. Cohn is not a party here and is making no claim before us that he failed to become a partner. It may well be that the failure to file the certificate required by section 91 did prevent the creation of a limited partnership in New York. However Cohn was a general partner in the firm and a general partnership would in any event exist between Cohn and the other general partners.*fn1 Cohn signed the partnership agreement, took partnership drawings and held himself out as a partner. We hold therefore that since he was a general partner, the claim that HW&Co converted the AT&T stocks because of a failure of consideration or breach of a condition necessarily collapses. If any conversion took place the tortfeasor was Cohn and not his firm.
Peerless next argues that it was fraudulently induced to transfer its AT&T stock to HW&Co, since the firm and Hertz and Warner were under an affirmative duty to disclose to Cohn and to Peerless all the material facts concerning the financial condition of the firm prior to the signing of the agreement and prior to the delivery of the stock by Peerless. Specifically appellants urge that there was an obligation on the part of the firm and the partners Warner and Hertz to disclose to Cohn the losses of 1969 which eventually almost wiped out the profits for that fiscal year. It is not disputed, and the court below found, that Hertz painted an optimistic picture of the firm's future in discussing Cohn's potential partnership; he stressed the high earnings of the last six months of 1968 but no mention was made of the losses in the early months of 1969, though they were known to him. There is no question but that one party to a business transaction is under a duty to disclose to the other such additional matters known to him in order to prevent his partial statement of the facts from being misleading. E.g., SEC v. Great American Indus., Inc., 407 F.2d 453, 461 (2d Cir. 1968) (en banc), cert. denied, 395 U.S. 920, 89 S. Ct. 1770, 23 L. Ed. 2d 237 (1969); Restatement (Second) of Torts § 551(2)(b) (Tent. Draft No. 12, 1966). Cf. Chris-Craft Indus., Inc. v. Piper Aircraft Corp., 480 F.2d 341, 388 (2d Cir.), cert. denied, 414 U.S. 910, 94 S. Ct. 231, 38 L. Ed. 2d 148 (1973). We have no doubt that the failure to disclose the firm's losses in the first half of 1969 prior to Cohn becoming a partner would constitute common law fraud, assuming that Cohn was not already aware of them. There is a major obstacle however to the appellant's claim here: Cohn, the allegedly defrauded partner to whom the firm had a fiduciary obligation, is not our plaintiff. His problems with the partnership have been submitted, as we have indicated, to the NYSE. The plaintiff-appellant is a third party, Peerless, which in fact is Cohn's in-laws, the Fines. A third party can recover damages for a fraudulent misrepresentation if he can establish that he relied upon it to his detriment, and that the defendants intended the misrepresentation to be conveyed to him.*fn2
The court below found as a fact that plaintiff herein -- formally a corporation, practically Cohn's in-laws -- has no basis for its claim of fraud against the partnership or any member thereof because "there was no deception of the Fines . . ., direct or indirect, by any member of [HW&Co]. In a general atmosphere of trust and affection, the Fines asked Cohn little or nothing about the firm or his projected status as a partner. He expressed generally rosy hopes. They were pleased for him over his seeming rise in the ...