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Seaboard Surety Co. v. Permacrete Construction Corp.

decided: March 22, 1955.


Author: Goodrich

Before GOODRICH, McLAUGHLIN and HASTIE, Circuit Judges.

GOODRICH, Circuit Judge.

This is an action for damages for an alleged fraud perpetrated upon the plaintiff surety company by what the plaintiff claims is the whole group of defendants who are joined in this action. A jury returned a verdict for the plaintiff for $40,000 which is considerably less than the amount claimed. The trial judge refused to interfere with the verdict except in the case of one defendant whose name is George B. Gay. Davis P. Smith and Thomas B. Smith Company, here referred to as a single defendant, appeal from the judgment. The trial judge set aside the verdict against George B. Gay and entered judgment in his favor. The plaintiff appeals from that judgment. There are, as thus explained, two appeals. But since they both grow out of the same set of operative facts we are treating them together in one opinion.

Factual Background

Smith says there is no basis for a judgment against him. In spite of a very elaborate argument made on his behalf we think he is wrong and think that the argument has made out of the case a much more complicated problem than it really is.

Perhaps some of this complication came through the effort to inform the court of all the background which led up to the litigation. The district judge summarized it briefly and accurately in his opinion overruling defendants' motions for judgment or a new trial.*fn1 We can, at this stage of the case, shorten the statement even more.

The lawsuit rose out of the failure of a building project which was to be carried out in Front Royal, Virginia. One of the defendants, Permacrete Construction Corporation, was the maker of prefabricated concrete pieces out of which a series of houses was to be built. The company for whom they were to be built was called Shenandoah Valley Housing Corporation. Federal Housing Authority and Reconstruction Finance Corporation were both involved in the general plan but not in any way which affects us here. Permacrete, the construction contractor, was required to give the ordinary contractor's performance bond.*fn2 It is at this point that the alleged fraud comes in. Permacrete had no assets but hope and expectation, yet they were entering upon a construction project that obviously required a considerable amount of cash outlay. There were two sets of representations.*fn3 One was to Shenandoah. Shenandoah was told that in order that a bond be forthcoming it must advance a good sized sum of money to Permacrete to get the building project under way. This it did. The second set of representations was, it was alleged and necessarily found, to the plaintiff surety company. This company had, since the very beginning of negotiations, insisted that Permacrete must have a large amount of cash on hand, not subject to debts, which could be used and which Permacrete would promise to use in carrying out the building plan. This could be cash capital and surplus or undistributed profits except of course there were no undistributed profits because Permacrete was a newly formed corporation.

This plan succeeded much better than the plans for building houses. Acting on the representation that a bank deposit made in a Philadelphia bank was unincumbered capital and surplus, the plaintiff company wrote the performance bond. The building venture folded without a single house having been built. Shenandoah sued the surety company upon the bond and the suit was settled for $35,000. Thereupon the surety company sued these defendants seeking to recover three items: (1) the $35,000 paid to Shenandoah in settlement, (2) $25,000 counsel fees incurred in the investigation and preparation for trial in the suit by Shenandoah against the surety company, and (3) miscellaneous cash outlay of $2,479.92.

The Smith Appeal

We need not trouble ourselves with the liability of Permacrete, Gannon or Weinrott. They have not appealed. But Smith urges vigorously that there is insufficient testimony to connect him with any fraud. Smith acted as a broker; his only stake was his broker's fee. Contrary to Smith's assertions however there is evidence which, if accepted by the trier of fact, ties him to the transaction by which the surety company was deceived.

It is not alleged that Smith himself made directly to the plaintiff any representations at all.*fn4 The case, from the plaintiff's point of view, against Smith is this: If witnesses testifying for the plaintiff spoke accurately, Smith was informed about the advance by Shenandoah to Permacrete. Smith, according to this testimony, also knew that it was being represented to the plaintiff that the money in the Philadelphia bank, the amount of which was verified by one of Seaboard's representatives, was unincumbered capital and surplus. If the testimony about Smith's knowledge is believed, then Smith knew it was not unincumbered capital and surplus but an advance from Shenandoah which was in turn secured by false statements to that company. Whether Smith's knowledge alone would impose liability upon him might present a hard question in view of Morrow v. Wilson, 1920, 266 Pa. 394, 109 A. 632; but we need not be concerned with that problem because the charge against Smith is that, knowing of the inaccuracy of the statement, he participated in the fraud by forwarding the statement to the surety company in order to induce its action.

Indeed, the case against Smith can be strengthened beyond this. There is testimony of the witnesses, Allman and Davis, the ones who explained how Smith knew all about the transaction, that (1) Smith participated in making representations to Shenandoah that Seaboard required the advance, and (2) that Smith represented himself to Allman and Davis as agent for the plaintiff, Seaboard.

If this testimony is accepted we do not need to resort to language describing "conspiracy" at all. What we have is a group of people charged with having committed a joint tort. If they in fact did do all these things together pursuant to a common plan, they are joint and several tort-feasors and can be held jointly or severally liable without any doubt. See Restatement, Torts, ยง 875 et seq.

The district judge realized all this. The defendants asked for a charge:

"A conspiracy to defraud on the part of two or more persons means a common purpose supported by a concerted action to defraud, each having the intent to defraud and each understanding that the other has that purpose."

The trial judge told the jury that the statement was correct but added, "I don't think it matters very much whether you call this plan a conspiracy or not. I have stated broadly that if there was a plan and Smith knew about it and participated in it by transmitting this information, then he could be held liable if the other elements are present." We completely agree.

Did the trial judge put the problem fairly to the jury so that it understood the question which confronted it in arriving at a verdict against all the defendants? The charge is a pleasure to read. In the early part of it the court tells the jury what is necessary to recover in an action for deceit. It is done so concisely that it is best to quote the language instead of paraphrasing it. He said:

"* * * the things the plaintiff who is seeking to recover in an action of this kind has to prove are that a representation was made to it of some fact; that it was a material representation; that it was false; that it was made by the defendants with the knowledge that it was false and with the intent that the plaintiff should act upon it; that the plaintiff did not know the fact, but relied on whatever information was given it; that it had a right to rely on it and that in so doing plaintiff was injured as a result of its reliance."

Later in the charge he covers the point about Smith very precisely. He says:

"* * * if Smith knew of the plan to get the bond by representing what was really an advance payment on the contract as capital and, with the knowledge that that representation was false, participated in this plan by forwarding that information without disclosing its falsity to the surety company and he could be held liable if the ...

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