Appeal from the District Court of the United States for the Northern District of Illinois, Eastern Division; John P. Barnes, Judge.
Before EVANS, SPARKS, and TREANOR, Circuit Judges.
This is an appeal from a judgment for $66,150 entered in an action in deceit to recover damages for alleged misrepresentations and concealments of fact. These were alleged to have induced appellee to purchase over $300,000 of bonds which subsequently resulted in an alleged loss of $250,157 to appellee. Appellant alleges error as to various rulings on evidence, instructions to the jury, and failure to grant its motions for a directed verdict and for a new trial.
The bonds in question were issued during the years 1925 to 1927 by a number of local improvement districts of the city of Longview, Washington. The districts were organized in accordance with the statutory provisions of that State which permitted the issue of such bonds, payable out of taxes colleted on special assessments levied by the districts against the lands within each district benefited by the improvement. The city itself was built by the Long-Bell Lumber Company on part of an 11,000 acre tract which it bought in 1922 at the junction of the Columbia and Cowlitz rivers. This tract had formerly been used for farming and grazing.
The Long-Bell Lumber Company, hereafter referred to as Long Bell, was a Missouri corporation which, prior to the period involved in this litigation, had carried on its business operations for the most part in the South. In 1919 and 1921, it had purchased extensive timber acreage in the Northwest, in Oregon and Washington. In order to provide for the large number of employees it expected to use in connection with its milling and manufacturing operations, it determined to build the new city near the rivers. The site chosen was subject to periodic overflows from the rivers, hence it was necessary to build a system of dikes, which work was done by Long Bell or its subsidiaries. The cost of the work was then funded through the organization of a diking district in accordance with the provisions of the Washington statute. The district issued its bonds and delivered them to Long Bell to pay for the work. Long Bell then proceeded, through one or more subsidiaries, to lay out the city of Longview, which was to be a model city with large parks and civic centers. Several public buildings were donated by R. A. Long, President of Long Bell. The city was planned on a scale large enough to accommodate a population of many more than the 15,000 or 20,000 expected to result from its own operations. An elaborate zoning system was laid out on a scale to provide for development in proportion to the contemplated increase of population. Extensive improvements were constructed such as paving, sidewalks, curbs and sewers. All the work was done by Long Bell and later taken over by the local improvement districts of which there were twenty-two. Only two of these, #11 and #19, covered the entire city, and all the others were for smaller units.
Beginning as early as 1922, and perhaps some time earlier, appellant, Halsey, Stuart and Company, had been closely associated with Long Bell. It had underwritten first mortgage bonds of that company totalling $20,000,000, acting, according to a statement contained in a prospectus pertaining thereto, as fiscal agent for it. It had also underwritten an issue of $3,250,000 of bonds of a railroad owned by a subsidiary of Long Bell and guaranteed by Long Bell, as well as the $3,225,000 issue of diking district bonds. When the local improvement district bonds were issued, each series was sold by Long Bell to Halsey, Stuart, for sale to the latter's customers. Halsey, Stuart knew that all of these bonds bore the guaranty of Long Bell. Halsey, Stuart not only distributed all the aforementioned obligations in the first place, but it also furnished practically the only market for them, buying them in for resale to its customers. A letter from one of its officers to Long Bell commented on the fact that, "In the last analysis we are the market on Long-Bell securities except possibly very small amounts * * * ." This letter related to a controversy over compensation claimed to be due Halsey, Stuart for handling a volume of about $55,000,000 of bonds of Long Bell, and indicated that appellant expected to be reimbursed by the latter for its expenses in handling the securities.
Early in May, 1930, B. C. Kelley, local representative of appellant in Des Moines, Iowa, approached appellee with a view to selling it some of the improvement district bonds. Appellee, a life insurance company incorporated in Iowa, had previosly made purchases of over $1,000,000 in securities from appellant for its investment portfolio. Under the provisions of the Iowa statutes, unsurance companies were permitted to invest their policy reserves in municipal securities, but not in obligations of private corporations. In 1927, Frank Wood, appellant's sales manager in charge of the Iowa-Nebraska-Colorado territory, had participated in the compilation of statistics preparatory to he drafting of an amendment to the Iowa statute relating to the investment of policy reserves, hence was familiar with the fact of its restrictions. Appellant also knew that appellee was interested in purchasing securities only for investment, and not for speculation or resale.
When Kelley proposed the purchase by appellee of the bonds in question, he delivered to F. W. Hubbell, a vice-president of appellee and in charge of its investment program, a number of documents pertaining to the issue. These consisted of an offering circular dated April 7, 1927, for a bond issue of $785,734; a tabulation of the number of assessment districts in Longview with the amount of bonds issued and redeemed by each, and the amount outstanding; copies of several full page advertisements of the city of Longview which had appeared originally in the Saturday Evening Post; some pamphlets issued by the Chamber of Commerce containing glowing descriptions of the city; and a balane sheet of Long Bell dated January 1, 1927.
The first item furnished, the Halsey, Stuart prospectus, was based on information submitted by Long Bell. It contained a description of the city of Longview, as being situated at the confluence of the Columbia and Cowlitz rivers, having a frontage of 7 1/4 miles along the former, and being a port of call for ocean-going vessels between Portland and the Pacific Ocean, with facilities for the largest cargo ships. It was also stated that: "Because of its natural advantages and proximity to the timber stands of the Long-Bell and Weyerhaeuser interests, Longview was selected as the site for the vast lumber manufacturing plants of these companies * * * . Manufacturing plants have also been erected by other concerns, including the Longview Concrete Pipe Co., the Pacific Straw, Paper and Board Co., Magor Car Corp., the Standard Oil Co., Longview Paint and Varnish Co. and the Central Mill Works. The first unit of the plants of the Longview Fibre Co., to cost 2 1/2 million dollars, is now well under way. Longview, with a population of 12,000, has now more than 36 miles of concrete paved streets, 115 miles of graded and gravelled streets, 71 miles of concrete sidewalks, 56 miles of water mains, and 48 miles of storm and sanitary sewers. The city has been laid out along model lines, and has excellent schools, a motorized fire department, a thoroughly modern hospital, library, community, Y.M.C.A. and other public buildings. Two banks report combined deposits of $1,500,000 and over 4,5000 depositors."
This prospectus contained the following clause: "All statements herein are official or are based on information which we regard as reliable, and while we do not guarantee them, we ourselves have relied upon them in the purchase of this security." The prospectus also contained the statements: "Exempt from Federal Income Taxes. Eligible as investments of mutual savings bank and insurance companies organized in the State of Washington," and "The payment of principal and interest on these bonds is unconditionally guaranteed by endorsement by the Long-Bell Lumber Company."
Another description, to which Hubbell said he gave considerable attention, from a Saturday Evening Post advertisement, stated: "The thoroughly moern, electrically operated manufacturing plants shown in the above sketch are in Longview, Wn. They produce 1,800,000 feet of Douglas Fir lumber a day. The buildings cover 72 acres. Six ocean-going freighters can load at one time at the Long-Bell docks. The equipment of the plants included every modern device for producing good lumber economically."
From these various descriptions, Hubbell testified that he was led to and did believe that the plants described were all located within the city of Longview. He knew then that District #19 covered practically the entire city.
The tabulation showed that of a total of $3,149,726 of bonds issued by twenty districts beginning September, 1925, $1,136,726 had been called up to May, 1930. These included $253,699 of the $908,699 issued by District #11 in May, 1926, and $137,104 of the $464,104 issued by District #19 in January, 1927.
Hubbell and Kelley both testified that the former asked for information about Long Bell as well as the city. In furnishing the information, Kelley turned over the file from appellant's Chicago office, containing all the data relating to the various issues, and also a financial report of Long Bell as of January 1, 1930. This 1929 financial report included a letter to stockholders signed by the President of Long Bell, dated March 12, 1930, stating:
"* * * General conditions during the closing months following the break in the stock market very seriously affected the consumption of lumber, which was reflected in our business.
"The last two weeks have shown some increase in demand, but prices have not improved and indications are not very flattering for the immediate future. * * * What the last two quarters of the year will be ...