author: HAYNSWORTH, Chief Judge:

text:
    Betty L. GOLD, on behalf of the Susquehanna Corporation, Appellee, v. Arthur W. SLOAN and Glenn L. Sloane, Appellants, Securities and Exchange Commission, Amicus Curiae. Betty L. GOLD, on behalf of the Susquehanna Corporation, Appellant, v. Keith E. RUMBEL, Appellee, Securities and Exchange Commission, Amicus Curiae. Betty L. GOLD, on behalf of the Susquehanna Corporation, Appellee, v. Arch C. SCURLOCK, Appellant, Securities and Exchange Commission, Amicus Curiae.
    Nos. 71-2180 to 71-2182.
    United States Court of Appeals, Fourth Circuit.
    Feb. 1, 1974.
    For opinions see 4 Cir., 486 F.2d 340.
   ON PETITION FOR REHEARING EN BANC

HAYNSWORTH, Chief Judge:

The plaintiff filed a petition for rehearing with a suggestion of a rehearing en banc. There was a request for a poll of the en banc court, but the suggestion has failed to receive the affirmative vote of a majority of the judges. Since a majority of the panel is not disposed to grant a rehearing of the case, the petition for rehearing will be denied.

I was one of those who voted for a rehearing en banc. I did so not because I thought the plaintiff got less than her due under the majority opinion; I think the majority gave her more than her due, but I voted for a rehearing in an effort to obtain an opportunity to attempt to persuade my colleagues to adopt an approach which apparently was not considered by any member of the panel. I take this opportunity, however, for a brief expression of my views for whatever contribution that expression may make in subsequent cases. I speak only for myself, of course. The defendant, Sloan, sought no rehearing, and the court’s denial of the plaintiff’s petition for rehearing carries with it no implication of endorsement or rejection of my views.

I

In Kern County Land Co. v. Occidental Petroleum Corp., 411 U.S. 582, 93 S.Ct. 1736, 36 L.Ed.2d 503, the Supreme Court adopted *the evolving notion that mergers should be regarded as a purchase or a sale of securities only if the transaction lent itself to the possibility of abuse of inside information. In Kern it was easy for the majority of the Supreme Court to determine that there was no possibility of abuse of Occidental’s position, for, though a statutory insider because of its recent acquisition of more than ten per cent of Kern County’s stock, it demonstrably was not an actual insider and had no access to inside information. Appropriately, the Court went no further than the needs of that case, observing that it was not holding that under no circumstances could a merger be properly treated as a purchase or a sale under § 16(b) and that it was holding only that it was not a sale under the circumstances presented by that case.

The Supreme Court’s opinion in Kern should not be read as holding more than it says. Judges traditionally write narrowly. A holding that a merger is not a sale by a statutory insider who actually has no access to inside information cannot be read as a holding that a merger is a sale by a statutory insider who does have access to inside information. If there is no access to inside information there is no possibility of abuse of inside information, but possibility of abuse is the touchstone, and there may be no such possibility even though the statutory insider does have access in general to inside information. Since Occidental had no access to inside information it was natural that the decision that there was no possibility of abuse of its position was put upon that ground and it is readily understandable that the majority did not write broadly to hold that the merger there would have presented no possibility of abuse even if Occidental had access to inside information.

We have that question in this case, for Sloan was required to disgorge his profit simply because he was the chief executive officer of ARC and the principal negotiator of the agreement with Susquehanna. I think he should not be required to surrender that profit because I find no possibility of abuse by him in the exchange pursuant to the merger agreement or in the negotiations leading up to it.

II

When an insider purchases corporate stock for cash, he alters his relative position with respect to other stockholders. He does the same thing when he sells the stock. In a normal purchase and sale situation, short term profits by insiders, who are thus attempting to benefit themselves in a manner in which other shareholders do not participate, are quite unseemly. Section 16(b) clearly requires that they turn over their short swing profits to the corporation, so that all shareholders participate in them.

The usual merger situation is quite different, for what advantage the insider gains is realized proportionately by every other stockholder. The insider is not in an adverse position with respect to any other stockholder, though he is in such a position when he buys or sells stock. What the insider does to effectuate the merger is done in the interest of all stockholders, and, if the merger proves beneficial, all the stockholders ratably share the gain.

Moreover, in a merger situation, the insider’s position as an insider is more technical than substantive. The requirement that all relevant information be disclosed to all stockholders leaves no relevant inside information to the exclusive possession of the insider, and there are adequate remedies for enforcement of the disclosure requirements.

In the normal merger situation, therefore, no insider has access to any inside information unavailable to all stockholders alike. In the exchange, each share-' holder is treated equally and all benefits from the merger are shared proportionately by all stockholders of each constituent corporation. The insider gains nothing disproportionately, and no outside stockholder loses any gain or advantage disproportionately.

In the usual merger situation, therefore, there is simply no potential for abuse by insiders of the sort contemplated by § 16(b). Unless the insider has : done something to alter his position relative to other stockholders, no such exchange ought to terminate an old holding period and start a new one running. When the insider’s advantage, derived from the exchange, does not differ in kind or quality from that realized by every other stockholder, there is simply no reason for creating a new holding period for the insider. Starting and stopping holding periods for the insider when he does something which alters his relative position with other stockholders is appropriate ; it is not when he has not.

III

Finding that a merger does not constitute a transaction for the purposes of § 16(b) does not leave outsiders without an available remedy when an insider reaps profits for himself by misuse of inside information. Section 16(b) was designed to be a simple, mechanical measure, aimed at a particular kind of speculative abuse, short-swing profiteering based on inside information. Balancing the competing factors, Congress chose ease of enforcement and predictability at the expense of some unfairness and overbreadth in administration. Partially in recognition of this harshness, the remedy for a § 16(b) violation is only restitution.

The appropriate provision in a situation where a sale of stock follows closely upon a merger is Rule 10b-5, with its attendant requirement of actual use of inside information. Whatever justification existed for the use of § 16(b) as a broad, anti-fraud provision before the development of Rule 10b-5, the subsequent maturity of the latter provision after SEC v. Texas Gulf Sulphur Co., 2 Cir., 401 F.2d 888, should assist in confining § 16(b) to the area where it can function effectively as a narrow, objective response to a particular kind of speculative abuse.

IV

If it should be held that the insider having access in general to inside information, though there is no undisclosed inside information relevant to the merger, effects a sale of his old stock when he exchanges it for stock of the surviving corporation, a most extraordinarily illogical pattern of application of § 16(b) would result.

If corporations A and B are merged under an agreement by which A is the survivor, A’s insiders would simply retain their stock certificates, but B’s insiders would exchange their stock certificates for fresh pieces of paper with A’s name on them. B’s insiders will be subject to potential liabilities under § 16(b), but A’s will not, though there is no substantive difference in the two groups of insiders. The surviving corporation usually will be the larger one, but that is not always the case. It was not the ease in the merger involved in Commissioner of Internal Revenue v. Morris Trust, 4 Cir., 367 F.2d 794, where a larger state bank and a smaller national bank were merged under an agreement under which the smaller national bank was the survivor. If two state banks decide to merge and their directors think it wise to have the merged banks operate under a national charter, the merger agreement may well call for the classical consolidation model in which a new national bank is organized and the stockholders of both state banks exchange their old certificates for new pieces of paper with the national bank’s name on them. In such an event, the insiders of both A and B will be subject to possible § 16(b) liabilities.

When a merger is contemplated, it may be important to all of the stockholders, collectively, to select one or the other of the merger participants as the surviving corporation, or to form a new corporation to acquire them both. That kind of business decision has nothing to do with the purposes of § 16(b), and it is simply irrational to suppose that Congress intended that the application of § 16(b) would depend upon the exercise of that kind of business judgment in the interest of all of the stockholders. If someone had proposed that Congress provide expressly that the insiders of any corporation that did not survive a merger would be subject to § 16(b) liability if they had purchased stock in the old corporation within six months of the merger or sold the stock of the survivor within six months after the merger, but the insiders of any surviving corporation would be subject to no such liability under any circumstances, it is hardly to be doubted that the Congress would have rejected the proposal out of hand.

If § 16(b) recognizes mergers in such fashion, its impact may be readily avoidable. If the continuing business will be served equally well by A’s charter or by B’s and A’s insiders have recently purchased shares of A’s stock while B’s insiders have neither purchased B’s shares recently nor sold A’s, liability is readily avoidable by making B the surviving corporation.

If an exchange of stock pursuant to a merger agreement is a sale and purchase by the insiders of the corporation which did not survive, the affected insiders are put in a position in which their individual interests may be in conflict with the interests of the stockholders collectively. The proposed merger agreement may be very much in the interest of the stockholders, collectively. If the insiders are exposed to potential § 16(b) liabilities, however, notwithstanding full disclosure of all relevant information and their receipt of no disproportionate advantage, their individual interests may tempt them to oppose the merger. If anyone is held subject to § 16(b) liability, despite faithful performance of his fiduciary duty, he does not derive proportionate advantages from the merger enjoyed by all other stockholders.

Consider, for instance, the hypothetical case of a man recently employed as the chief executive officer of a corporation and who, contemporaneously, invests a substantial portion of his resources in its stock. Soon he finds that a very advantageous merger can be effected, but not on terms which would make his corporation the survivor. If he does not report the possibility of the merger to his directors or, after reporting it, he opposes it, he is faithless to his duty. If he performs his fiduciary duty to the other stockholders and the merger is accomplished, he has subjected himself to § 16(b) liability, so that he is penalized for his faithfulness and deprived of the proportionate advantage realized out of the merger by all of his fellow stockholders.

These kinds of weird and completely unjustifiable results are inescapable unless the rule be what I suggest. Surely Congress had no intention of penalizing insiders for faithfulness to their fiduciary duties or to subject them to substantial potential § 16(b) liability upon the basis of a resolution by the negotiators of the irrelevant question of the selection of the corporation to survive the merger. Congress should not be thought to have intended results so irrational and quixotic.

V

For such reasons, in the usual merger situation, I think the insider should not be held to have sold his old securities and purchased new ones if, in the exchange, he has not derived an advantage disproportionate to the advantages gained by his fellow stockholders. Whether a transaction constitutes a transaction for the purposes of § 16(b) depends upon the nature of that transaction, and whether it gives rise to a possibility of speculative abuse. As long as the nature of the transaction requires that all shareholders be treated equally, there can be no possibility of abuse, and hence, no § 16(b) transaction. An ordinary merger, because it necessarily treats all shareholders equally, does not give rise to speculative abuse, and should not be considered a transaction for the purpose of § 16(b). I would have voted for reversal as to the defendant, Sloan, as well as to the other defendants in this ease.

      . Some such potential for abuse might arise in an extraordinary situation, but such potential would depend upon the addition of some other ingredient. It was appropriate, therefore, for the Court in Kern to observe, as it did, that it was not suggesting that an exchange of stock in consummation of a merger “may never result in § 16(b) liability,” 411 U.S. 582, 600, 93 S.Ct. 1736, 1747, for it may in a situation in which insiders have not acted faithfully in the interests of all stockholders.

      . There is a possibility, of course, that Sloan misused inside information when he sold his Susquehanna stock. In that event, he should be liable under Rule 10b-5, regardless of his holding period. Possibility of abuse at the time of sale, however, has nothing to do with the possibility of abuse at the time of the exchange under the merger agreement. That exchange, under § 16(b), is a transaction stopping and starting holding periods only if a possibility of abuse inheres in it. For a discussion of the distortion of § 16(b) by its use where Rule 10b-5 would have been more appropriate, see, Note, Reliance Electric and 16(b) Litigation: A Return to the Objective Approach, 58 Va.L.Rev. 907 (1972).


source: Caselaw Access Project

author: PER CURIAM:

license: Public Domain

text:
    PACIFIC ARCHITECTS AND ENGINEERS INCORPORATED and Advanced Maintenance Corporation v. The UNITED STATES.
    No. 298-72.
    United States Court of Claims.
    Jan. 23, 1974.

      Loren R. Rothschild, Los Angeles, Cal., attorney of record, for plaintiff.
    David R. Schlee, Washington, D. C., with whom was Acting Asst. Atty. Gen. Irving Jaffe, for defendant.
    Before KASHIWA, KUNZIG, and BENNETT, Judges.
   OPINION

PER CURIAM:

This case comes before the court on defendant’s motion, filed October 2, 1973, requesting that the court adopt, as the basis for its judgment in this case, the recommended decision of Trial Judge Philip R. Miller, filed August 14, 1973, on the parties’ cross-motions for summary judgment pursuant to Rule 166(c), plaintiff having failed to file a request for review by the court of said recommended decision within the time provided by the Rules of the court therefor. Upon consideration thereof, it appears that plaintiff has also failed to timely respond to defendant’s motion of October 2, 1973, and since the court agrees with the trial judge’s recommended decision, without oral argument, it hereby grants defendant’s motion and adopts the said decision as the basis for its judgment in this case. Accordingly, plaintiff’s motion for summary judgment is denied, defendant’s like cross-motion is granted and plaintiff’s petition is dismissed.

OPINION OF TRIAL JUDGE

MILLER, Trial Judge: The petition herein seeks payment of $38,424.52. The claim is derived from a contract with the Air Force for the operation of food service facilities at Vandenberg Air Force Base, California, for an 11-month period commencing November 1, 1968.

Item 1 of the contract provided for preparation of an estimated 1,290,247 meals at facilities on the Base, for service at dining halls, missile sites and remote areas throughout the Base at a unit price of $.30785. Item 2 called for preparation of an estimated 118,959 meals at an in-flight kitchen at a unit price of $.246455. The originally estimated total price was $426,520.58, but the contract was modified to add a special additional mess facility and meals due to a flood in January and February 1969, which increased the estimated contract price to $430,406.13.

Reflecting the fact that costs could vary with increases and decreases from the estimate, the contract contained provisions for adjustment to wit:

PART IV. CHANGE IN PRICE BASED ON VARIATION FROM ESTIMATE
(Oct. 1959):
a. If the actual number of meals served under this contract, to other than Contractor personnel, varies from the number of meals estimated (in accordance with (b) below) to be served during any calendar month, the price paid the Contractor for meals served in that month shall be adjusted in accordance with the following formula:
b. Adjustments in price by reason of this clause will be made at the end of each calendar month for the meals served during that month. The basis for determining the estimated number of meals to be served in a given month will be obtained by dividing total estimated number of meals for the entire contract period by the total number of days in that period and multiplying the results by the number of days in the month involved.

To deal with greater variations than those set forth above, Part IV further provided:

c. If the number of meals served in any calendar month (to other than contractor personnel) varies from the estimated requirements for that month by more than 30% of such requirements, the Contractor and the Contracting Officer will negotiate an equitable adjustment in the contract price for that month in the manner provided in the Changes Clause of this contract.

The Changes Clause in the contract provided that if any change caused an increase or decrease in the cost of performance, an equitable adjustment should be made in the contract price. Failure to agree to any adjustment would be a dispute concerning a question of fact within the meaning of the standard Disputes Clause.

In fact the Government’s estimate was much too high, for in no one of the 11 months did the number of meals served even approach the estimate. In 7 of the 11 months the number of meals served was less than 70 percent for either Item 1 or Item 2, as shown by the following tabulation:

In January 1969, plaintiff requested the contracting officer to make the equitable adjustment required by reason of the fact that the December 1968 meals had fallen below 70 percent of the estimate. In February 1969, plaintiff informed the contracting officer that its own projections showed only 709,102 meals for Item 1 and 60,481 meals for Item 2 over the entire contract period, and it requested a revision of the contract prices to $.6629 and $.4875, respectively, instead of those stated in the contract, so that the contract price of $426,-520.58 originally estimated for an aggregate of 1,409,205 meals would be paid for only 769,583 meals. No acceptable agreement could be arrived at, and, by change order to the contract, in May 1969 the contracting officer provided for payment to plaintiff for those months in which meals fell below the 70 percent level, as if 70 percent had been served and at the increased unit price provided therefor in the contract. It was agreed, however, that plaintiff’s acceptance of such payments would not prejudice its claim for additional payment.

In January 1970 after completion of the period, plaintiff submitted a claim for equitable adjustment for all of the 7 months in which one or the other of the items had fallen below 70 percent of the estimated meals. The claim was based on the plaintiff’s costs for those 7 months plus 6 percent profit. This was rejected by the contracting officer for the reason that plaintiff’s bids had been improvidently low so that even if all of the estimated meals had been served, plaintiff could not have made a profit. The loss had also been added to by an unanticipated new labor contract increasing labor costs in May 1969. Since these were a part of plaintiff’s and not the Government’s risks, the adjustment could not be used as a device for converting the contract from a loss to a profit. In October 1970, the contracting officer issued his final decision which based the equitable adjustment on the amount the plaintiff would have received if 100 percent of the estimated meals had been served in the 7 months in which the number of either of the items was less than 70 percent, less an offset for the additional costs plaintiff would have had to incur. This resulted in payment for 286,088 additional meals which plaintiff never served.

As finally made, the Government’s adjustment paid to the plaintiff was computed as follows:

7 months estimated meals at 100%--------------- $235,050.24
Less cost savings for curtailed services___________ —5,234.80
$220,821.44
Less payment already made (Including offset for lost equipment not in dispute)_________________—167,477.60
Net adjustment_________________________________ $62,343.84

It was stipulated that plaintiff received for the 7 months in question total payment of $225,507, including the above adjustment. Plaintiff’s costs for those months, exclusive of legal fees, were $248,992.

The petition seeks an additional $38,-424.52, which it computes as follows (par. 10):

Plaintiff’s costs for the 7 months in dispute-------- $248, 992.00
Less amount received for the 7 months___________—225,507.00
Net difference—_________________________________ $23,485.00
Plus 6% profit on $248,992.00____________________ 14, 939.52
$38, 424.52

Plaintiff claims the $38,424.52 for the 7 months under three different legal theories : first, as the appropriate equitable adjustment under the contract; second, as restitution after rescission of the contract, because the Government misrepresented the facts which induced it to enter into the contract; and, third, as damages for breach of contract, because the contracting officer’s decision was not the result of his own exercise of judgment but a determination dictated to him by others. Plaintiff claims no other damages from the misrepresentation.

I

Plaintiff’s claim under the contract for an equitable adjustment which would include all costs for meal service for the 7 months plus a 6 percent profit thereon cannot be sustained as a proper equitable adjustment under the contract. The differences between the parties relate to the proper construction and application of a contract clause and hence present a question of law with respect to which the decision of the Board is not final. Nevertheless the Board appears to be correct.

The Variation from Estimate Clause provides no guidelines for the computation of the equitable adjustment therein. It merely states that if the 30 percent variation from requirements occurs the contractor and the contracting officer will negotiate an equitable adjustment in the contract price for that month “in the manner provided in the Changes Clause” of the contract. If this language is not an express adoption of the manner in which the “equitable adjustment” is computed under the Changes Clause, the very absence of further description or definition calls for giving the same content to the term, since the purpose and context of the “equitable adjustment” in the Variation from Estimate Clause would appear to be not very different from that stated in the Changes Clause (to adjust the contract price for a “change [which] causes an increase or decrease in the cost of * * * performance”). Moreover, as this court had occasion to point out in General Builders Supply v. United States, 409 F.2d 246, 250-251, 187 Ct.Cl. 477, 484 *(1969), in construing the same phrase in another new application :

* * * [T]he meaning of “equitable adjustment” had become, so to speak, a “trade usage” for those engaged in contracting with the Federal Government. The knowledgeable federal contractor would understand it, and plaintiff, if it was not so knowledgeable, was charged with making itself aware of that usage. Cf. Uniform Commercial Code § 1-205. Since it was dealing with the Government, as to which a whole body of special contract provisions has developed, plaintiff could hardly take the naive stance that it had the right to read its contract as an unsophisticated layman might, without bothering to inquire into the established meaning and coverage of phrases and provisions which appear to be unusual or special to federal procurement.

And cf. also Dravo Corp. v. United States, 480 F.2d 1331, 202 Ct.Cl. __ (1973).

It is well established that the equitable adjustment may not properly be used as an occasion for reducing or increasing the contractor’s profit or loss, or for converting a loss to a profit or vice versa, for reasons unrelated to a change. A contractor who has underestimated his bid or encountered unanticipated expense or inefficiencies may not properly use a change order as an excuse to reform the contract or to shift his own risks or losses to the Government. Nager Electric Co. v. United States, 442 F.2d 936, 945-946, 194 Ct.Cl. 835, 851-583 (1971); Keco Industries, Inc. v. United States, 364 F.2d 838, 849-850, 176 Ct.Cl. 983, 999-1002 (1966), cert. denied, 386 U.S. 958, 87 S.Ct. 1027, 18 L.Ed.2d 105 (1967); S. N. Nielsen Co. v. United States, 141 Ct.Cl. 793, 796-797 (1958). As the court stated in Bruce Construction Corp. v. United States, 324 F.2d 516, 518, 163 Ct.Cl. 97, 100 (1963), “Equitable adjustments are simply corrective measures utilized to keep a contractor whole when the Government modifies á contract.”

Here the Board found it to be clear that plaintiff’s contract was a loss contract and that plaintiff would have suffered a loss even if 100 percent of the Government’s estimate had been served in the 7 months at issue. (Bd.Op., p. 7; on Reconsid., p. 2.) It found it unnecessary to decide whether or not the loss was attributable to an improvident bid or to the execution of an unforeseen labor contract which in May 1969 increased plaintiff’s costs by 8 cents per man hour, since neither event created any right of reimbursement by the Government. The record fully supports the Board’s finding. The amended contract price for serving 100 percent of the meals estimated therein was no more than $430,406.13. In a letter to the contracting officer dated January 21, 1970, plaintiff stated that, “[t]he contractor * * * incurred costs * * * in the total amount of $455,141.16” for serving what was in effect an average of 68 percent of estimated meals over the contract term. Thus, even if it would not have cost plaintiff one penny more to serve the 442,870 additional meals over the entire 11 months and if it had been paid the full estimated contract price, plaintiff would still have incurred a loss of $24,735.03. That plaintiff’s costs were in excess of 100 percent of the contract price for the 7 months at issue has already been noted.

Under the circumstances the decisions of the contracting officer and the Board awarding to the plaintiff the full contract price (less cost saving) for all of the meals estimated in each of the 7 months was quite generous. It obviated the necessity for plaintiff to prove the extent of its increased costs attributable to the shortfall. It gave plaintiff the benefit of any bargain it could fairly have contemplated for each of such months in entering into the contract, by paying plaintiff for an additional 286,088 meals which it had no occasion to serve during the 7 months.

Plaintiff’s claim under the contract for an equitable adjustment which would include all costs for meal service for the 7 months plus a reasonable (6 percent) profit is based on the decision in United States v. Pickett’s Food Service, 360 F.2d 338 (5th Cir., 1966). That case involved an Air Force food service contract with substantially identical clauses. There the number of meals served fell below 70 percent of the estimate in eight out of the 12 months under the contract. The contracting officer granted the contractor an equitable adjustment based upon increasing the monthly compensation to that which would have been payable had 70 percent of the meals been served, which included a small increase in quantity and the 112 percent of unit price premium applicable to that percentage under the contract. The Board affirmed his decision on the ground that the contractor failed to show any increase in unit cost as a result of the shortfall. The court of appeals, differing with the Board, stated both that no increase in unit cost need be shown and that plaintiff “clearly showed an increase in unit cost as a result of the deviation from the 100% estimate,” and then held that (360 F.2d at 343):

The contractor is entitled to reasonable compensation for his services, which in this case we feel best can be reached by determining what the cost would have been for any prudent contractor similarly situated, plus a reasonable profit. (Emphasis ours [the court’s].)

To the extent that the Pickett’s Food Service decision stated that the reference to the Changes Clause in the Variation from Estimate Clause is only to the procedure for applying the equitable adjustment once determined and that the Changes Clause provides no guidance as to the method of computation of the adjustment, the decision is contrary to the views expressed herein. However, the court did not explain its reasoning. It did not consider whether or not the parties might have understood or intended the “equitable adjustment” concept in the light of its long history of judicial interpretation. In any event, the statement is at best only an alternative ground for decision.

More important, the Pickett’s Food Service decision does not help the plaintiff with respect to resolution of the issue herein. First, the question there was as to the validity of an adjustment which gave plaintiff compensation increased only to the extent of the price for 70 percent of the amount estimated by the contract for each month, not 100 percent, as here. The decision does not reflect what the court would have done had the adjustment by the contracting agency given the contractor the full equivalent of its bargain for each month requested. Second, nothing in the Pickett’s Food Service opinion indicates that the food service contract there at issue would have resulted in a loss to the contractor even if the quantity had coincided with the estimate; certainly the court did not discuss the question from that perspective at all. It cannot be assumed that the Fifth Circuit meant to differ with the rationale of such decisions of this court as S. N. Nielsen Co. and Bruce Construction Corp., supra, without even mentioning them. Third, as already indicated, the court found that Pickett’s had proven the unit cost increases attributable to the shortfall in the months at issue, whereas here the Board found that plaintiff did not “show an increase in costs incurred as a result of the meal count deviation.” (Op. on Reeonsid., p. 2.) Finally, the court made a point of stating that it did not “pass on the question of how an equitable adjustment can-best be determined in other cases” (360 F.2d, supra, p. 343), but only that it was a responsible and workable one under the circumstances of the case before it.

Plaintiff also contends that it was improper for the Board to consider whether or not the contract was a loss contract, because the contracting officer was required to make the adjustments promptly from month-to-month before he could know the entire contract would involve a loss. Assuming the contract could be so construed, plaintiff is really asking for an “equitable” adjustment which would allow it a windfall. If each contemporaneous monthly adjustment gave plaintiff 100 percent of the contract price estimate for the month, it would still give plaintiff the economic equivalent of its bargain for that month and there would still be no equitable reason for giving it more. Moreover, even if the contracting officer had made contemporaneous monthly price adjustments, the cost of contract performance was not so complex as to preclude the making of monthly profit and loss analyses; and nothing prevented him from making the adjustments on a tentative basis pending completion of the contract. In fact, in considering plaintiff’s first claim for an equitable adjustment for December 1968, on March 11, 1969, the contracting officer properly noted that “the information supplied by the contractor indicated that a loss would be experienced by the contractor even if the meals ordered were 100% of the estimated quantities.” (Op., p. 4.)

II

Plaintiff’s claim for restitution is based on the theory that its bid was induced by factual misrepresentations as to the number of meals to be served, which were either fraudulent or so grossly negligent as to entitle plaintiff to rescind the contract. The Government represented that a fair estimate of the aggregate number of meals to be served over the 11-month contract term was 1,409,-205, a figure which was in excess of the number actually required during the period (966,335) by 46 percent. As a prima facie showing of the fraud or gross negligence it hopes to prove, it points to the facts that the actual number did not approach the estimate in any month under the contract, that in the majority of months the actual meals served were less than 70 percent of estimate, and further, that four of the sites for which 47,762 meals had been estimated, had ceased operations prior to the issuance of the solicitation and one site, for which 5,344 meals had been estimated, ceased operations after issuance of the solicitation but prior to the award of the contract. The closed sites, however, account for less than 4 percent of the estimate, and the record before the Board contains no explanation as to the reason for the large discrepancy.

Plaintiff seeks a trial de novo before this court on its rescission and restitution claim. In support of its motion for summary judgment, defendant asserts that the claim is based upon the same operative facts and seeks the same relief as the claim presented to the Board, that the Variation from Estimate Clause contemplates this situation and provides full relief in the form of an equitable price adjustment for wide variations from estimate. Therefore, defendant maintains, plaintiff is not entitled to a judicial retrial of a claim it agreed to present to the Board by redescribing it as a claim for a breach.

The primary difficulty with defendant’s argument is that if plaintiff’s allegations are supportable the entire contract may be voidable, including the clauses with respect to Variations from Estimate, Changes and Disputes. A party who has been induced to enter into a contract by a material misrepresentation of fact has the option of either ratifying or avoiding the contract at his election. If he ratifies it, he may properly insist upon the benefits of the bargain ; if he rescinds, he is entitled to repudiate all of the contract provisions and to be restored to the status quo ante. Ringsby Truck Lines, Inc. v. Beardsley, 331 F.2d 14, 17 (8th Cir. 1964); Restatement of Contracts §§ 476, 484 (1932); Restatement of Restitution §§ 28, €8 (1937); 1 and 1A Corbin, Contracts §§ 146 at 636, 265 at 538 (1963) ; 12 Williston, Contracts § 1523 at 608 (1970).

It is not unfair to impute to the Government the representation that the figures set forth in the solicitation were bona fide estimates of the meals then being served or expected to be required during the contract term at the Air Force Base and the intent that bidders should rely upon them in shaping their bids. Even estimates must be made in good faith. (See Lipshitz & Cohen v. United States, 269 U.S. 90, 92, 46 S.Ct. 45, 70 L.Ed. 175 (1925); Krupp v. Federal Housing Adm., 285 F.2d 833, 835, n. 2 (1st Cir. 1961).) The provision for equitable price adjustments for variations from estimate may fairly have given notice to bidders that changes, even drastic ones up or down, might occur in the staffing of the Base, but it may hardly be deemed to have nullified the implied representation that the estimates were then made in good faith or with reasonable care on the basis of the facts then known to the Government.

Defendant’s contention that the same operative facts were involved'in the proceedings before the Board is not correct. The Board specifically held that the request for rescission of the contract invoked a power it did not possess and dismissed the claim for that reason (Op., p. 8). It was irrelevant to the issue before the Board whether the discrepancies between the estimates and the actual meals served were attributable to a falsification of the estimates to induce a lower bid or to later unanticipated changes. The Board merely concluded that: “The record does not disclose why all of the estimated number of meals was not required.” (Op., p. 6.)

However, plaintiff’s claim to recission is vulnerable for another reason. The option to avoid a contract for fraud or misrepresentation is lost if after acquiring knowledge thereof the injured party continues with performance. He is deemed to have affirmed or ratified the voidable contract. Ling-Temco-Vought, Inc. v. United States, 475 F.2d 630, 201 Ct.Cl. 135 (1973); Restatement of Contracts § 484 (1932); Restatement of Restitution § 68 (1937); 12 Williston, Contracts, supra and § 1527; 1 and 1A Corbin, Contracts, supra. For then, absent special circumstances, plaintiff’s continued losses in excess of those recoverable under or for breach of the contract are no longer due to the misrepresentation, and it deprives the Government of its right to avoid liability in excess of that set forth in the contract (see Ling-Temco-Vought, Inc. v. United States, supra).

The findings of the Board relevant to the issue it did decide are sufficient to establish that plaintiff affirmed the contract and did not exercise or retain its option to avoid or repudiate it after it knew of the alleged misrepresentation.

Plaintiff’s election to make a claim under the Variations from Estimate and Changes Clauses and to pursue the matter before the Board was not an unambiguous ratification of the contract, since in the absence of a direct precedent charting the proper course of conduct in pursuance of a claim to restitution for misrepresentation of estimates in a situation such as this it could have subjected itself to the peril of having failed to exhaust its administrative remedies. However, plaintiff’s other actions do represent more clearly the exercise of a choice to affirm the contract.

Having been able to serve only 75 percent (Item 1) and 70 percent (Item 2) of the estimated meals for November and 64 percent and 63 percent, respectively, for December 1968, by the end of the second month plaintiff had more than an inkling that the estimates were way off. Nor can it reasonably claim that after 2 months it was still unaware that the five remote sites at which it was to provide service (accounting for about 4 percent of estimate) were closed and without personnel. On February 27, 1969 plaintiff requested a revision of the contract prices for the reason that the Government’s estimate of 1,409,205 meals for the contract term was erroneous, because on the basis of the actual facts for the prior year and the first 4 months under the contract (through January) it could project an aggregate of only 769,583 meals (Op., p. 4). Thus if the Government’s misestimate of its requirements was a fraudulent or material misrepresentation which induced plaintiff to enter in the contract, plaintiff was sufficiently informed of it no later than February 1969. At that point it was in a position to elect to avoid the contract and to seek such restitution as would restore it to the status quo ante or to ratify the contract by continuing performance and relying upon the contract for redress. Having chosen the latter alternative, it is now too late for plaintiff to claim that the contract is still voidable for the original misrepresentation.

Plaintiff’s petition in this court is also inconsistent with repudiation of the contract, because it seeks additional compensation only for the 7 months in which the number of meals served was below 70 percent of estimate and does not offer to relinquish such benefits as it may have obtained from the contract in the other months. See Svendborg v. United States, 130 F.Supp. 363, 367, 131 Ct.Cl. 399, 406-407 (1955) petition for cert. dismissed, 350 U.S. 978, 76 S.Ct. 455, 100 L.Ed. 848 (1956); 5 Corbin, Contracts § 1114 at 607, 608, 618. Finally plaintiff’s claim to a profit on its performance for the 7 months is inconsistent with a choice of rescission and restitution. Restitution would entitle plaintiff merely to be restored to the status quo ante, pursuant to which it would be limited to its prudent costs, without the profit it anticipated under the contract. Acme Process Equipment Co. v. United States, 347 F.2d 509, 530-531, n. 29, 171 Ct.Cl. 324, 360 n. 29 (1965), rev’d on other grounds, 385 U.S. 138, 87 S.Ct. 350, 17 L.Ed.2d 249 (1966).

III

Plaintiff’s final claim is that there was a breach of contract by defendant because the contracting officer’s decision with respect to the equitable adjustment was not the product of his personal and independent judgment, but was dictated to him by others. The Board found that the evidence did not establish “that the contracting officer failed to put his own mind to the adjustment problem and render his own decision.” (Op. p. 9; on reconsid., p. 3.) Defendant relies for summary judgment on the findings and record of the Board, while plaintiff, in opposition, contends that since such conduct constitutes a breach summary judgment on the basis of the Board findings and record is improper. .

The Variation from Estimate Clause provided that the “contractor and the contracting officer will negotiate an equitable adjustment in the contract price” and the Disputes Clause provided that “any dispute concerning a question of fact arising under this contract * * shall be decided by the Contracting Officer, * * * ”

It is apparent the placing of responsibility on the contracting officer for determining the adjustment conferred considerable discretion on him. There were no guidelines on the fixing of the unit price. He had to determine, whether or not, in view of the Government’s misestimate, the amount should include payment for more meals than were in fact served, and the extent thereof. He had to consider the economic effect of the shortfall on the contractor’s costs. He could consider the Government’s culpability in the misestimate and the extent of the contractor’s reliance thereon. If the increased payment was for actual meals not served, he could consider the fairness of an offest for the contractor’s cost savings.

In view of the foregoing and also the fact that the contract provided an opportunity for negotiation and agreement with the contracting officer, which would necessarily entail the submission to him of factual presentations and equitable arguments, in entering into the contract it is fair to impute to the parties the intent that the determination be made by the contracting officer in the exercise of his own discretion. New York Shipbuilding Corp. v. United States, 385 F.2d 427, 435, 180 Ct.Cl. 446, 460 (1967); and see also Schlesinger v. United States, 390 F.2d 702, 707-709, 182 Ct.Cl. 571, 581-584 (1968). On the other hand, it is unreasonable to construe the requirement for decision by the contracting officer to preclude the obtaining of legal advice, and particularly where the contracting officer is not a lawyer. Even if an overly liberal grant by a contracting officer would not be reviewable on the Government’s appeal, it would have to be assumed that the contracting officer like any other officer of the United States would do his best to follow the requirements of law. It was contemplated that after receiving recommendations, legal opinions and advice, “in the end he put his own mind to the problems and render his own decisions.” New York Shipbuilding Co. v. United States, supra, 385 F.2d at 435, 180 Ct.Cl. 460. But there was no implied prohibition against his first obtaining or even agreeing with the views of others. J. A. Terteling & Sons, Inc. v. United States, 182 Ct.Cl. 691, 694, 390 F.3d 926, 927 (1968) ; Jacob Schlesinger, Inc. v. United States, 94 Ct.Cl. 289, 307 (1941).

Plaintiff advances no reason why the Board’s findings on this issue should not be treated as findings “concerning a question of fact” which both the Disputes Clause and the Wunderlich Act provide shall be final and conclusive if supported by substantial evidence. That plaintiff claims a breach of contract does not make the findings any the less dis-positive. United States v. Utah Constr. Co., supra, 384 U.S. at 419, 86 S.Ct. 1545. In Schlesinger v. United States, supra, the court assumed, without necessity for discussion that such question could properly be reviewed solely on the administrative record.

The Board found here:

# * # -X- *
* * * [T]he testimony of the contracting officer, largely in response to leading questions by appellant’s counsel, upon which appellant relies, falls short, we think of an admission that the final decision was not his own. The matter he discussed with the Government attorneys did not relate to a question of fact nor a matter involving his independent “business” discretion and judgment, * * but, rather, the interpretation of a court decision. The contracting officer’s unled testimony referred to the attorneys’ comments as “legal advice.” He was entitled to the benefit of that advice, to consider it and to accept it. That acceptance did not mean that the contracting officer failed to put his own mind to the problem and render his own decision. * * * The appellant has not proved more than that the discussion with his lawyers caused the contracting officer to accept legal advice that the Pickett’s decision, supra, did not compel an equitable adjustment based on this contractor’s costs, thus allowing him to exercise his judgment and return to his previous position as to a proper adjustment. * * * [Op. pp. 8-9.]

In the portion of the record upon which plaintiff relies for the abdication of discretion argument the contracting officer, who was not a lawyer, testified that on the basis of his reading United States v. Pickett’s Food Service, supra, he had initially made an offer to settle the plaintiff’s claim for plaintiff’s cost plus a reasonable profit. The testimony continued:

Q [Plaintiff’s Counsel] What happened between September 28th and October 7th to cause you to withdraw the offer?
A [Contracting Officer] I had legal advice that my offer was incorrect and I should withdraw it—resubmit it.
Q When you say that you should withdraw it and resubmit—
A Make a final determination.
Q Who gave you that advice?
A Mr. Adams, Colonel Bohdan Danyliw.
Q Do you recall what they said to you to cause you to change your position?
A Not verbatim, I can’t. The upshot of it was, that they thought a fair settlement was 100 percent of the contract price.
Q They thought a fair settlement was 100 percent ?
A Yes.
Q And you went along with that?
A That’s right.
Q Did they give you any written instructions with respect to the question?
A I don’t recall. I don’t believe they did.
Q Was this the result of a telephone conversation?
A Yes, it was.
Q Which they hold you to “alter your position and withdraw the $93,-000 offer”, is that correct?
A Yes, sir.
[Plaintiff’s counsel] I have no further questions.

Plainly this testimony is not enough to prove that the contracting officer’s final decision on matters with respect to which it was expected he would exercise his discretion was not his own. It is doubtful that the testimony even tends to support" plaintiff’s contention. The witness first testified that he regarded the communication as legal “advice.” Subsequently counsel asked the witness whether it was by a telephone conversation rather than written instruetion. It is not clear whether the witness’ affirmative response interrupted the question before it was completed, because counsel apparently continued, “[in] [w]hich they told you to alter your position and withdraw the prior offer, is that correct?” Counsel argues in effect that the witness’ affirmation at this point indicates his agreement that he accepted a peremptory direction or order. But it is at least equally probable that he was merely reiterating the prior response which he had given before the question was completed, that the communication was in a telephone conversation rather than in writing. Moreover, “told” is a word having different shades of qualitative meaning, including the wholly neutral one of “said.” Plaintiff’s counsel may have intended it in the sense of “ordered” or “instructed” but he gave no warning to the witness that he was now changing the subject and drawing a different distinction than whether the communication was oral or in writing, but between legal advice and an order or direction. Elemental fairness requires a more explicit notice to the witness before he may be deemed to have repudiated his prior testimony.

McCormick, Evidence (§ 7, 2nd ed., 1972) states the following with respect to the probative force of leading questions which contain assumptions:

* * * A still more common vice is for the examiner to couch the question so that it assumes as true matters to which the witness has not testified and which are in dispute between the parties. The danger here is twofold. First, if the examiner is putting the question to a friendly witness, the recitation of the assumed fact may suggest the desired answer; and second, whether the witness is friendly or hostile, the answer is likely to be misleading. Oftentimes, the question will be so separate from the assumption that if the witness answers the question without mentioning the assumption, it is impossible to ascertain whether he ignored the assumption or affirmed it.

In Tombigbee Constructors v. United States, 420 F.2d 1037, 1048, 190 Ct.Cl. 615, 634-635 (1970), the court discussed a similar situation. There the question was whether the contractor had agreed that certain extra work should be done without cost. In questioning the Government’s engineer, Government counsel asked whether during certain negotiations the contractor had “again” agreed to bear responsibility for the work in question. The witness responded, “That is correct.” (420 F.2d at 1048, 190 Ct.Cl. at 634-635.) The court, on reviewing the administrative record, found that there was no evidence in that record regarding a prior agreement by the plaintiff to pay these costs and that therefore the response to Government counsel’s questions was of little probative value:

* * * A question which assumes a fact not conceded or not yet in evidence is not only leading, it is misleading as well. * * * Answers to questions so egregiously leading are more than improper and objectionable; they are not probative. The Board should not have credited, and apparently did not credit the testimony as evidence of an agreement to do the work without pay. * * * [Emphasis supplied.] [420 F.2d at 1048, 190 Ct.Cl. at 635.]

The presiding Board member who heard and observed the evidence was in the best position to determine the witness’ credibility. The Board’s conclusion was that greater weight should be given to the witness’ earlier unled testimony than to the part on which plaintiff relies. It is not the function of this court in a Wunderlich Act review to weigh the evidence independently, but merely to examine it to see if there is substantial evidence to sustain the administrative findings. Chaney & James Constr. Co. v. United States, 421 F.2d 728, 738, 742, 190 Ct.Cl. 699, 717, 724 (1970). The Board’s findings on this issue are supported by substantial evidence.

CONCLUSION

Plaintiff’s motion for summary judgment is denied. Defendant’s cross-motion for summary judgment is granted and plaintiff’s petition.is dismissed.

      . The record shows that the contracting officer had twice requested plaintiff to review the computation of its bids because they were far below the prior years’ unit prices.

      . Wunderlich Act, Ch. 199, § 2, 68 Stat. 81, 41 U.S.C. § 322 (1970).

      . Plaintiff’s claim that it lost the opportunity for compensation for serving in excess of 100 percent of estimated meals is purely speculative.

      . This information was obtained from plaintiff’s correspondence with the contracting officer and by its contemporaneous profit and loss statements.
      Plaintiff’s profit and loss statement for the first two months reflected November 1968 operating expenses of $44,679.53 as against receipts of only $32,073.71 for serving 75.09 percent (Item 1) and 70.12 percent (Item 2) of the estimated meals. If compensation for the meals served were increased to 100 percent of estimate, plaintiff’s receipts would still have been only $38,425.55 (115,980 x $.30785 plus 11,041 x $.246455). December expenses were $40,440.37 for serving only 64.5% (Item 1) and 62.73% (Item 2) of estimate. Payment for 100 percent of the estimated meals for that month (119,753 x $.30785 and 11,041 x $.246455) would have given plaintiff receipts of only $39,587.07.

      . Defendant cites in support of its argument principally: United States v. Utah Constr. Co., 384 U.S. 394, 418-420, 86 S.Ct. 1545, 16 L.Ed.2d 642 (1966) ; Dale Ingram, Inc. v. United States, 475 F.2d 1177, 201 Ct.Cl. 56 (1973) ; Teitelbaum v. United States, 458 F.2d 72, 87-88, 198 Ct.Cl. 150, 176-177 (1972) ; Hoel-Steffen Constr. Co. v. United States, 456 F.2d 760, 768, 197 Ct.Cl. 561, 574 (1972) ; Northbridge Electronics v. United States, 444 F.2d 1124, 1127, 195 Ct.Cl. 453, 458 (1971).

      . Cf. 6A Corbin, Contracts § 1444A at 465, with respect to the applicability of an arbitration provision in a contract induced by fraud:
      “If the making of the principal contract, including the provision for arbitration itself, was induced by the fraud of one of the parties, the provision for arbitration will fall along with the principal contract if the aggrieved party exercises his power of avoidance; * * But see Robert Lawrence Co. v. Devonshire Fabrics, Inc., 271 F.2d 402 (2nd Cir. 1959), cert. dismissed, 364 U.S. 801, 81 S.Ct. 27, 5 L.Ed.2d 37 (1960), where the arbitration clause was held separable and valid because it was not induced by the fraud. However, in the absence of express agreement it seems unreasonable to impute to a defrauded party the intent to be bound by the unilateral decision of the contracting officer of the defrauding party as to whether he has been guilty of fraud and the “equitable” adjustment therefor—irrespective of the availability of a board of contract appeals.

      . Such facts are entitled to finality in a new trial even “when the contractor sues for relief which the board was not empowered to give.” United States v. Utah Constr. Co., supra, 384 U.S. at 420, 86 S.Ct. at 1559.

      . Plaintiff’s administrative controller testified he knew of it in February 1969.

      . The agreement in May 1969, that plaintiff’s acceptance of payments for 70 percent of estimate where the level of service fell below it, pursuant to Contract Change Order No. 1, would not prejudice its claim for additional payment obviously referred to additional payment under the contract, of which it had been continuing performance.


author: JOHN W. PECK, Circuit Judge.

text:
    BANQUE de DEPOTS, Plaintiff-Appellee, v. NATIONAL BANK OF DETROIT, Defendant-Appellant.
    No. 73-1327.
    United States Court of Appeals, Sixth Circuit.
    Argued Dee. 3, 1973.
    Decided Feb. 14, 1974.

      Patrick J. Ledwidge, Detroit, Mich., for defendant-appellant; Dickinson, Wright, McKean & Cudlip, Detroit, Mich., on brief.
    G. Cameron Buchanan, Detroit, Mich., for plaintiff-appellee; Alexander, Buchanan & Seavitt, Detroit, Mich., on brief.
    Before PHILLIPS, Chief Judge, and WEICK and PECK, Circuit Judges.
   JOHN W. PECK, Circuit Judge.

The events which led up to this controversy began in the Spring of 1971. Wilford 0. Dunkel, a wealthy Michigan resident and share-holder of Champion Home Builders Company, (hereinafter “Champion”) found himself in need of large amounts of cash. He determined to use his Champion stock, which at that time consisted of more than 296,000 shares worth in excess of $7,000,000, as collateral for the anticipated loan. For various reasons he preferred not to obtain the loan from an American source and decided to negotiate with foreign lenders. Through an acquaintance he was put in contact with James Dondick, an American citizen who was in Switzerland. Dondich agreed to help Dunkel obtain the loan.

At this point the litigant banks entered the picture. Dunkel was a customer of National Bank of Detroit (hereinafter “National Bank”), the defendant-appellant herein. He asked National Bank to do two things: (1) receive from him and hold certificates for shares of Champion stock for the security for the loan he was arranging; and (2) use its international telex facilities to transmit messages on his behalf. National Bank agreed to do this. Meanwhile, Dondich began meeting with officials of Banque de Depots in Geneva, Switzerland, and negotiating- for a loan of 1.5 million dollars on the strength of 260,000 shares of Champion stock.

Dunkel delivered to National Bank certificates for shares of Champion in an amount sufficient to raise the total number of shares of Champion held by the Bank to 296,400. Immediately prior to this visit Dunkel was indebted to National Bank in the amount of $927,000 and this indebtedness was secured by Champion stock already in the Bank’s possession. On June 24, 1971, a telex message originating from the National Bank was sent to Banque de Depots which read as follows:

“We confirm we hold in our collateral file 267,000 shares of Champion Home Builders Co. common stock. These shares have been authenticated and verified by our bank. The assignments of these shares have been executed by Mr. Dunkel and Mr. Dunkel, a customer of this bank has asked that we inform you that James Dondich, passport No. J1187001'is authorized to pledge these shares for a loan up to an amount of dollars 3,500,000 U.S. currency.”

Banque de Depots’ reply was in the form of a question.

“Are these shares free of all restrictions in particular fully registered and freely tradeable?”

National Bank answered that,

“the 267,000 shares of Champion Home Builders Co. stock which we hold are free of all restrictions and are freely tradeable on the American stock exchange.”

To make certain that there was no error, Banque de Depots sent a telex to the National Bank on June. 25th seeking confirmation:

“Re our exchange of telexes in the Champion Home/Dunkel/Dondidge (sic) matter. Please authenticate message and your authority thru Swiss Bank Corporation. Sorry this inconvenience which due to my no code with you. I advised Swiss Bank Corporation here of this telex.”

The import of this message was that Banque de Depots wanted the additional assurance of authenticity that a “key tested” message would provide. A “key tested” telex message is essentially equivalent to a signed letter.

National Bank sent the requested “key tested” telex to the Swiss Bank Corporation which relayed it to Banque de Depots. The message contained the same information that had been previously exchanged, namely, that National Bank was holding 267,000 shares of Champion stock in a collateral file for Banque de Depots and that Dondich was authorized to pledge the shares for a loan up to $3,500,000.

After receiving the “key tested” telex from the Swiss Bank Corporation on June 28, 1971, Banque de Depots entered into a loan agreement with Dondich, received his note, and made a loan to him for $500,000, the bank’s loan limit. Thereupon it sent a telex to National Bank which read as follows:

“We have granted loan to Mr. Dondich and as per your above tested telex we assume the shares are now under our control . . . please confirm

The Dondich note was presented for payment in accord with its provisions, but it was not paid. Banque de Depots demanded that National Bank make the note payment or deliver the collateral. National Bank refused.

Banque de Depots brought suit against both Dunkel and National Bank seeking either a money judgment or delivery of the Champion stock. National Bank’s answer denied any liability to Banque de Depots and asserted that the Bank was only acting as Dunkel’s agent in sending the telexes. Dunkel likewise denied liability. Banque de Depots then filed a motion for summary judgment against National Bank alone. National Bank filed motions for leave to amend its answer in the form of a counterclaim and cross-claim for interpleader, and a cross-claim for indemnification. The motion to amend the answer in the form of interpleader was denied, and, the motion for a cross-claim amendment was not ruled upon. At the commencement of the trial Banque de Depots moved for dismissal of Dunkel under Rule 41, Fed. R.Civ.P., and the District Court, over the objection of National Bank, entered an order to that effect.

The case proceeded to trial before a jury. Banque de Depots based its claim on the theory that the telex messages constituted a contract between the litigant banks and that National Bank breached that contract. It also alleged that the statements made by National Bank in the telexes were false and amounted to misrepresentations. National Bank denied the existence of a contract and contended it was not liable for the alleged misrepresentations even if there were any. National Bank perfected this appeal from a judgment entered in favor of Banque de Depots on the jury’s verdict.

National Bank asserts that as a matter of law the telex communications between it and Banque de Depots were insufficient to form a contract. This argument is based on two points: (1) that there was not the necessary meeting of the minds to form a contract; and (2) that the communications were merely preliminary negotiations. Both parties agree that Michigan law is applicable.

The Michigan courts have adopted and repeatedly reaffirmed the basic tenet of contract law that a “meeting of the minds” upon all essential points is necessary to constitute a valid contract. Professional Facilities Corporation v. Marks, 373 Mich. 673, 131 N.W.2d 60 (1964); Fisk v. Fisk, 328 Mich. 570, 44 N.W.2d 184 (1950). National Bank claims that a number of material terms in the alleged contract were not agreed upon and, therefore, the requisite meeting of minds never took place. “To say . . . that a contract requires a ‘meeting of the minds’ is only a figurative way of saying that there must be mutual assent. This we judge by an objective standard, looking to the expressed words of the parties and their visible acts.” Goldman v. Century Ins. Co., 354 Mich. 528, 535, 93 N.W.2d 240, 243 (1958). In the case before us the “expressed words of the parties and their visible acts” were contained in the telex messages. The telexes clearly stated that National Bank was holding 267,000 shares of Champion stock in a collateral account for Banque de Depots and that Dondich was authorized to pledge this collateral for a loan up to $3,500,000. National Bank argues that it never intended for Banque de Depots to lend money to Dondich, but the meaning that Banque de Depots attached to the messages was reasonable. “If one party has knowingly or negligently misled the other by his use of words . he can not escape responsibility by proving his own meaning and intention.” 1 A. Corbin, Contracts, § 106, at 477 (2d ed. 1963). We find no error in the Trial Court’s conclusion that an enforceable contract existed between the parties. Similarly, we see no merit in the contention that the telexes were merely preliminary negotiations.

Banque de Depots’ alternative theory at trial was that two statements made by National Bank in the telex messages were untrue and constituted actionable misrepresentations. The statements were that “the 267,000 shares of stock which we [National Bank] hold are free of all restrictions” and, “we pledge [the stock] for the collateral account of Banque de Depots.” National Bank contends that the statements were true and that even if untrue were innocently made. Further, it asserts that the misrepresentation issue was erroneously submitted to the jury because under Michigan law an action for misrepresentation cannot be sustained when there is no intent to deceive and the defendant is neither a party to the transaction nor receives the benefit of plaintiff’s loss.

Michigan law does indeed require proof, in the case of an innocent misrepresentation, that the culpable party benefited from the other party’s injury. Kroninger v. Anast, 367 Mich. 478, 116 N.W.2d 863 (1962); Essenburg v. Russell, 346 Mich. 319, 78 N.W.2d 136 (1956); Rosenburg v. Cyrowski, 227 Mich. 508, 198 N.W. 905 (1924). In order to prevail upon this issue, however, National Bank must show that the statements were true or that the misrepresentations were innocently made. It has failed on both counts. It is abundantly clear from the evidence that the stock was not free of all restrictions because part of it was hypothecated to National Bank for the $927,000 loan, and it is equally clear that a collateral account was never set up for Banque de Depots. These statements were not, as National Bank suggests, merely misunderstood by Banque de Depots, they were false.

The second part of the question is whether the false statements were made innocently. The Michigan courts have recognized that a misrepresentation made “recklessly” is the same as one made “intentionally.” Callihan v. Talkowski, 372 Mich. 1, 124 N.W.2d 788 (1963); Aldrich v. Scribner, 154 Mich. 23, 117 N.W. 581 (1908). In this case National Bank knew or should have known that Banque de Depots was relying on the truth of the statements made by it in the telex messages. National Bank was, at the very least, acting recklessly when it sent the telexes. We conclude that the resulting misrepresentations were actionable under Michigan law and that this issue was properly submitted to the jury.

National Bank maintains that the District Court erroneously denied its motions to amend its answer. “Rule 15(a) F.R.Civ.P. provides in pertinent part that ‘a party may amend his pleading only by leave of court * * *; and leave shall be freely given when justice so requires.’ It is well established that allowance or refusal to permit amendment lies in the discretion of the district court and ‘is not subject to review on appeal except for abuse of discretion * * *.’ 3 Moore’s Federal Practice, para. 15.08(4).” Komie v. Buehler Corp., 449 F.2d 644, 647 (9th Cir. 1971). That is the rule in this Circuit as well. Willard Dairy Corp. v. National Dairy Corp., 309 F.2d 943 (6th Cir. 1962), cert. denied, 373 U.S. 934, 83 S.Ct. 1554, 10 L.Ed.2d 691 (1963).

National Bank cites Foman v. Davis, 371 U.S. 178, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962), in support of the proposition that in the absence of such factors as undue delay, bad faith, undue prejudice, and futility it is an abuse of discretion for a district court to deny an opportunity to amend. It also asserts that none of the above elements were present in this case. The Supreme Court did not, however, consider the above factors standing alone to' be controlling, for in the same paragraph it mentions that discretion is abused only if amendment is denied “without any justifying reason . . . .” 371 U.S. at 182, 83 S.Ct. 227. In the instant ease the record reveals that the Bank’s request for permission to amend its answer in the form of defensive inter-pleader was on shaky ground because of’ the questionable applicability of inter-pleader in this factual setting. Further, the cross-claim against Dunkel would, in the District Court’s opinion, have worked an undue hardship on him. We cannot say, in light of the record, that the District Court clearly abused its discretion in denying National Bank’s motions to amend.

In this same vein National Bank claims that Dunkel’s dismissal from the suit at the beginning of the trial was clearly erroneous. The applicable rule is Rule 41(a)(2), Fed.R.Civ.P., which reads in part as follows: “[A]n action shall not be dismissed at the plaintiff’s instance save upon order of the court . If a counterclaim has been pleaded by a defendant . . . the action shall not be dismissed against the defendant’s objection unless the counterclaim can remain pending for independent adjudication by the court.” National Bank’s attempt to amend its answer having failed, there was no counterclaim before the Court and thus, Dunkel’s dismissal was within the sound discretion of the Court. Armstrong v. Frostie Co., 453 F.2d 914 (4th Cir. 1971); Willard Dairy Corp. v. National Dairy Corp., supra; Moore, Federal Practice ¶ 41.05, at 1055 (2d ed. 1971). The District Court felt that Dunkel’s remaining in the suit would prejudice both Dunkel and Banque de Depots, and conversely, his dismissal would not .prejudice National Bank. Regardless of any reservations we might otherwise have harbored, we must defer to the Trial Court’s exercise of discretion.

The final assignment of error relates to the computation of interest. The adverse parties stipulated that the District Court should determine the manner in which interest would be computed. After noting the applicable Michigan law, the Court found that the Dondich note carried an 8 ½% interest rate. In addition, it held that the note was the obligation out of which the breach arose and, therefore, Banque de Depots was entitled to an amount equal to the face amount of the loan plus fees and interest at the rate of 8%% from June 29, 1971, to the time of the judgment. We have examined National Bank’s arguments on this issue and find them to be without merit.

For the reasons hereinabove appearing, the judgment of the District Court is affirmed.

      . The use of telex communication systems is a common method of communication between banks, particularly for trans-Atlantic exchange of information. A telex machine is essentially a typewriter with a capacity for electronic transmission of the material typed and also capacity for electronic reception, and automatic typing, of incoming messages. It is further common among banks to utilize privately arranged number codes as a means of authenticating the identity of the bank sending the message. These code numbers are often called “key tests.”


author: MANSFIELD, Circuit Judge:

text:
    Barthelmio DALLI, Appellant, v. UNITED STATES of America, Appellee.
    No. 47, Docket 73-1536.
    United States Court of Appeals, Second Circuit.
    Argued Oct. 24, 1973.
    Decided Jan. 14, 1974.

      Albert J. Krieger, New York City (Alan Scribner, New York City, of counsel), for appellant.
    Paul V. French, Asst. U. S. Atty. (James M. Sullivan, Jr., U. S. Atty., N. D. N. Y., Syracuse, N. Y., of counsel), for appellee.
    Before SMITH, MANSFIELD and OAKES, Circuit Judges.
   MANSFIELD, Circuit Judge:

After a jury trial before Judge MacMahon Barthelmio Dalli was on May 26, 1969, convicted of selling, receiving and concealing heroin, 21 U.S.C. §§ 173 and 174, and of conspiracy to commit the same, 18 U.S.C. § 371. He was sentenced to concurrent terms of 20 years on each of two counts. The conviction was affirmed by this court. United States v. Dalli, 424 F.2d 45 (2d Cir.), cert. denied, 400 U.S. 821, 91 S.Ct. 39, 27 L.Ed.2d 49 (1970). In November 1972 Dalli filed a petition pursuant to 28 U.S.C. § 2255 alleging that the evidence admitted at his trial was tainted by illegal wiretap activities of the New York state police. In support of his petition Dalli introduced an affidavit from a'former New York state police lieutenant who had supervised the alleged wiretapping. On the basis of the motion papers and the files and records of the case, Judge MacMahon denied the motion without a hearing. In view of the deficiencies of the supporting affidavit we affirm.

Appellant’s § 2255 petition seeks in effect to reopen an issue raised and resolved against him after a pretrial suppression hearing in May 1969. Prior to appellant’s trial a full evidentiary hearing was held to determine whether his arrest and the heroin found in his possession at the time of arrest were the fruits of an allegedly illegal state wiretap. The federal government maintained that its investigation and arrest of the appellant were independent of any state investigation or wiretap. Federal agents testified that their interest in appellant was sparked by his frequent visits to the Beauty Trail Hair Parlor, reputedly an emporium for narcotics, located in Brooklyn. Their observations prompted them to check appellant’s telephone record, which disclosed several calls to Thomas Pytel, a man suspected by Canadian authorities to be trafficking in narcotics. Further surveillance of appellant revealed a meeting on September 7, 1968, between appellant and Stanley Simmons, likewise a suspected dealer in narcotics. Several days later federal agents followed appellant and Simmons to a Plattsburg, New York, motel where the two met with Pytel and a Canadian associate to transact some business in narcotics. Dalli and Simmons were arrested shortly after leaving the motel with 11 pounds of heroin in their possession.

At the 1969 pretrial suppression hearing it was disclosed that the New York state police had, pursuant to a New York state court order, been wiretapping the Beauty Trail Hair Parlor during August and September 1968. The government produced the wiretaps and transcripts thereof for inspection by appellant. Dalli and his co-defendants seized upon only one call as evidence of taint. The call was between Dalli and Simmons, made from the telephone at the Beauty Trail Hair Parlor, in which the two agreed to meet on the evening of September 7, 1968. This was the meeting watched by the federal agents, which occurred several days prior to Dalli’s arrest. The agents, however, testified that they had received no information concerning the September 7th meeting from the state police, that their knowledge of the meeting and their ultimate arrest of appellant resulted solely from their 24-hour surveillance of appellant, and that they did not learn of the wiretaps until much later, shortly before the 1969 hearing. Supporting their version of the case was the testimony of Charles Cassino, then a New York state police lieutenant in charge of the Beauty Trail Hair Parlor wiretaps. Cassino testified that he had passed no wiretap information to the federal agents; indeed, he professed ignorance of the fact that Dalli had spoken with Simmons on an intercepted call. On the basis of this testimony the district court concluded that the federal investigation and arrest of Dalli stood untainted by the state wiretap activities. Thereupon Dalli was tried and convicted.

Three and one half years after his conviction Dalli sought by the present § 2255 petition to overturn the earlier finding that his conviction was untainted, or at least to re-argue its merits, largely on the basis of an affidavit from former lieutenant Cassino. Judge MacMahon, who had presided at the 1969 suppression hearing and trial, dismissed the present petition without an evidentiary hearing. Appellant here urges that it was error to have denied him a hearing. We disagree.

As a recent pronouncement indicates, this court takes a dim view of any summary rejection of a petition for postconviction relief when supported by a “sufficient affidavit.” See Taylor v. United States, 487 F.2d 307 (2d Cir. Nov. 14, 1973). But we have, consistently with that pronouncement, recognized that a judge is well within his discretion in denying a petition when the supporting affidavit is insufficient on its face to warrant a hearing. See Accardi v. United States, 379 F.2d 312 (2d Cir. 1967); Mirra v. United States, 379 F.2d 782 (2d Cir. 1967). Section 2255 requires a hearing to resolve disputed issues of fact “unless the motion and the files and records of the case conclusively show that the prisoner is entitled to no relief.” See Fontaine v. United States, 411 U.S. 213, 215, 93 S.Ct. 1461, 1462, 36 L.Ed.2d 169 (1973). In making that threshold determination the court looks primarily to the affidavit or other evidence proffered in support of the application in order to determine whether, if the evidence should be offered at a hearing, it would be admissible proof entitling the petitioner to relief. Mere generalities or hearsay statements will not normally entitle the applicant to a hearing, D’Ercole v. United States, 361 F.2d 211, 212 (2d Cir.), cert. denied, 385 U.S. 995, 87 S.Ct. 610, 17 L.Ed.2d 454 (1966), rehearing denied, 385 U.S. 1032, 87 S.Ct. 758, 17 L.Ed.2d 680 (1967); United States v. Catalano, 281 F.2d 184 (2d Cir.), cert. denied, 364 U.S. 845, 81 S.Ct. 88, 5 L.Ed.2d 69 (1960); Paroutian v. United States, 395 F.2d 673, 674 (2d Cir. 1968), cert. denied, 393 U.S. 1058, 89 S.Ct. 700, 21 L.Ed.2d 700 (1969); Holland v. United States, 406 F.2d 213, 216 (5th Cir. 1969); Barnett v. United States, 439 F.2d 801, 802 (6th Cir. 1971), since such hearsay would be inadmissible at the hearing itself. United States v. Pisciotta, 199 F.2d 603, 607 (2d Cir. 1952); Brady v. United States, 404 F.2d 601, 602 (10th Cir. 1968), aff’d., 397 U.S. 742, 90 S.Ct. 1463, 25 L.Ed.2d 747 (1970). The petitioner must set forth specific facts which he is in a position to establish by competent evidence. Machibroda v. United States, 368 U.S. 487, 495-496, 82 S.Ct. 510, 7 L.Ed.2d 473 (1962). Furthermore, where the petitioner has already had a full evidentiary hearing upon the same claim and seeks another hearing on grounds of newly discovered evidence, greater specificity is required than if no hearing had been held, in order to avoid relitigation of issues on the basis of proof already deemed insufficient.

Applying these principles, we are satisfied that the Cassino affidavit, which is the crux of the petition, failed to meet this threshold of sufficiency. Most of the affidavit is devoted to evidence already received and considered at the 1969 suppression hearing. When it comes to the key “newly discovered” evidence offered to support the renewed claim that the federal arrest and seizure was tainted by the state wiretap Cassino’s averments are not only vague, indefinite and eonclusory but marbled with hearsay. Thus Cassino states that “ [subsequent to May, 1969, I learned that it was a common practice during the course of this investigation for Investigator Kaynor [of the New York state police] to take the tapes representing the previous day’s eavesdropping and together with Agent John J. O’Brien of the Bureau of Narcotics and Dangerous Drugs, go to one of these rooms and there review the tapes.” (Emphasis added). This is not only hearsay, but hearsay singularly lacking in specificity. Cassino does not say how or from whom he learned this. His testimony along these lines would be inadmissible at a hearing on Dalli’s petition. There is no indication that the wiretaps or transcripts of them were in fact furnished to the federal officers, much less that this fact would be established by competent evidence.

The other portion of the Cassino affidavit heavily relied upon by appellant is its vague statement to the effect that the Dalli-Simmons meeting of September 7th “persuaded us to seek further eavesdropping assistance, and telephone numbers presently unknown to me located at or near the residence of Dalli were tapped.” Although we cannot confidently say whether this averment is based on hearsay or on Cassino’s personal knowledge, its indefinite form sharply reduces its substantiality. See Townsend v. Sain, 372 U.S. 293, 313, 83 S.Ct. 745, 9 L.Ed.2d 770 (1963); Accardi v. United States, 379 F.2d 312, 313 (2d Cir. 1967). Furthermore it is somewhat inconsistent with other evidence offered as corroboration for Cassino’s allegation of undisclosed wiretaps on Dalli. This evidence, to which counsel for Dalli has directed our attention, consists of a report issued by judges of the New York Supreme Court, Kings County, which schedules the applications for, and authorizations of, wiretaps during the period of June 20 to December 31, 1968 (a period relevant to the present case). The report indicates that on August 8, 1968, a district attorney sought and received approval for three wiretaps, one on a beauty parlor and two on private residences. At trial the government had disclosed only two wiretaps as related to this case, one on the Beauty Trail Hair Parlor and the other on the residence of Ronald Carr, owner of the parlor, both issued on August 8th. Dalli now suggests that the report of a third wiretap corroborates Cassino’s allegation that there was a wiretap on Dalli’s home. Cassino’s affidavit, however, alleges that the state police were prompted to seek further taps as a result of the DalliSimmons meeting of September 7th, which postdates by one month the date, August 8, 1968, when the application for the third tap was granted. While the report indicates that there may have been an unaccounted for and possibly related wiretap, it hardly provides direct corroboration for Cassino’s story, especially in view of the gross disparity in time between the affidavit and the report.

Even if Cassino is correct in his belief that a tap was initiated on Dalli’s home telephone, Cassino is not in a position to aver, and nowhere in his affidavit does he attempt to aver as a matter of personal knowledge that any information from a state wiretap was passed to federal agents. That there was any transmittal of wiretap information was denied under oath by the federal agents who testified at the original hearing. Edward Kaynor, the state police investigator reported by Cassino on the basis of an unidentified source as having passed wiretap information to the federal agents, submitted an affidavit in opposition to the appellant’s motion in which he also denied each such allegation. Moreover, portions of Cassino’s affidavit are specifically contradicted by his prior testimony at trial. Furthermore the credibility of the affidavit was for other reasons open to question. With the obvious deficiencies of the Cassino affidavit viewed against the files and records of the case and in light of the fact that petitioner had already had one hearing on substantially the same claim the trial court did not err in denying the petition without a hearing.

The order below is affirmed.

      . As part of the same effort the home telephone of Ronald Carr, owner of the beauty parlor, was tapped.

      . Subsequent to Judge MacMahon’s decision to dismiss, appellant learned of a state court report of wiretaps authorized during the period under question. Appellant believes that this report substantiates certain of Cassino’s statements in his affidavit. We will consider that report as part of the record for this appeal.

      . The statement was nonetheless felicitously worded from Cassino’s point of view. He says he learned of the cooperation between Kaynor and O’Brien subsequent to May 1969. May 1969 was of course the time of Cassino’s appearance at the Dalli pretrial hearing where he offered testimony that conflicts with that of the affidavit.

      . Although opposing affidavits from the government cannot be deemed part of the records and files of a case for purpose of showing that the petitioner is entitled to no relief under 28 U.S.C. § 2255, Taylor v. United States, 487 F.2d 307 (2d Cir. Nov. 14, 1973), they may be considered in assessing the sufficiency of the petitioner’s supporting affidavit. See United States v. Catalano, 281 F.2d 184 (2d Cir.), cert. denied, 364 U.S. 845, 81 S.Ct. 88, 5 L.Ed.2d 69 (1960).

      . At the suppression hearing Cassino testified that he had no knowledge of a conversation between Dalli and Simmons on the wiretap. His affidavit now indicates that he knew of the September 7th conversation between Dalli and Simmons intercepted on the Beauty Trail Hair Parlor phone and that he knew of still another conversation between Dalli and Simmons that he alleges was intercepted on Dalli’s phone.

      . Subsequent to his testimony at the 1969 suppression hearing, Cassino was convicted of aiding a racketeering enterprise in violation of 18 U.S.C. § 1952 and sentenced to a federal penitentiary. Although this fact, as well as Cassino’s long silence on this wiretap point and his motive now to testify falsely, would not standing alone justify the denial of a hearing, the district judge was entitled to take these circumstances into consideration in deciding whether evidence requiring a hearing had been stated. “The language of the statute [§ 2255] does not strip the district courts of all discretion to exercise their common sense.” Machibroda v. United States, 368 U.S. 487, 495, 82 S.Ct. 510, 514, 7 L.Ed.2d 473 (1962).


text:
    Melvin Allen BURRIS, Appellant, v. STATE DEPARTMENT OF PUBLIC WELFARE OF SOUTH CAROLINA, Appellee.
    No. 73-1753.
    United States Court of Appeals, Fourth Circuit.
    Submitted Dec. 4, 1973.
    Decided Feb. 8, 1974.

      John B. Culbertson and John B. Duggan, Greenville, S. C., for appellant.
    Daniel R. McLeod, Atty. Gen. and John B. Grimball, Asst. Atty. Gen., for appellee.
    Before HAYNSWORTH, Chief Judge, WINTER, Circuit Judge, and TURK, District Judge.

      Sitting by designation.

   PER CURIAM:

In an amended complaint filed in the District Court plaintiff alleged that he was denied due process of law in violation of the Fifth and Fourteenth Amendments to the United States Constitution in that the defendant, State Department of Public Welfare of South Carolina, did not afford him an adequate hearing before denying his application for Aid to the Totally and Permanently Disabled. The District Court Judge granted the defendant’s motion to dismiss the complaint on the ground that the court did not have jurisdiction because the complaint failed to state a substantial federal question or the requisite jurisdictional amount.

Although plaintiff’s complaint did not allege a violation of his constitutional rights under Title 42 U.S.C. § 1983 with jurisdiction pursuant to Title 28 U.S.C. § 1343(3), the expansive protection provided by these statutes would have encompassed his allegations and entitled him to consideration by the court of the merits of his complaint regardless of jurisdictional amount. Of course an action brought pursuant to 42 U.S.C. § 1983 must seek relief from a “person” which would apparently not include the named defendant, State Department of Public Welfare of South Carolina. See City of Kenosha v. Bruno, 412 U.S. 507, 93 S.Ct. 2222, 37 L.Ed.2d 109 (1973); Monroe v. Pape, 365 U.S. 167, 81 S.Ct. 473, 5 L.Ed.2d 492 (1961). See also Moor v. County of Alameda, 411 U.S. 693, 93 S.Ct. 1785, 36 L.Ed.2d 596 (1973).-

Without expressing or implying any opinion whatsoever as to the merits of plaintiff’s complaint, the court is of the opinion that the District Court Judge should have apprised plaintiff’s counsel of the availability of 42 U.S.C. § 1983 and 28 U.S.C. § 1343, and assuming that the complaint is amended to come within these statutes, the District Court should accept jurisdiction and consider the merits of the case. Accordingly, the order dismissing plaintiff’s complaint is vacated, and this case is remanded to the District Court for further proceedings consistent with this opinion.

Vacated and remanded.