author: GEWIN, Circuit Judge:

text:
    SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellant, v. CONTINENTAL COMMODITIES CORPORATION et al., Defendants-Appellees.
    No. 73-2429.
    United States Court of Appeals, Fifth Circuit.
    July 17, 1974.

      Wayne M. Whitaker, Robert F. Watson, S. E. C., Ft. Worth, Tex., Thomas Taylor, Richard E. Nathan, Gen. Counsel, S. E. C., Washington, D. C., for plaintiff-appellant.
    Sam N. Vilches, Jr., Fletcher Yarbrough, Martin Frost, Temporary Receivers, Dallas, Tex., for defendants-appellees.
    Before RIVES, GEWIN and RONEY, Circuit Judges.
   GEWIN, Circuit Judge:

This appeal is taken from a district court order denying a preliminary injunction sought by the Securities and Exchange Commission (SEC) against Continental Commodities Corporation (Continental Commodities), Charles Long, and Continental Commodities Trading Company. The complaint filed by the SEC sought to enjoin Continental Commodities from committing alleged violations of various registration provisions of the Securities Act of 1933, 15 U.S.C. §§ 77e(a), 77e(c), and 77q(a) (1970), and of the anti-fraud provisions of the Securities Exchange Act of 1934, 15 U.S.C. 78.j(b) (1970) and Rule 10b-5 thereunder, 17 CFR § 240.10b-5 (1973), and petitioned for the appointment of a receiver of all assets and property belonging to or in its possession. The district court deemed jurisdiction of the subject matter to be lacking, reasoning that none of the transactions engaged in by Continental Commodities involved a security within the meaning of the two aforementioned Acts. In view of our disagreement with this conclusion, we reverse and remand for consideration by the district court of the propriety of granting the relief requested by the SEC.

I

According to the verified complaint, Continental Commodities, a Texas corporation incorporated in November of 1972, Charles Long, its President, and Continental Commodities Trading Company, a partnership formed in California by Long in mid-January 1973, offered to sell and sold to public investors interests denominated options on commodities futures contracts. Headquartered at a Los Angeles office in which all options were written, the trading enterprise was a member firm of the West Coast Commodity Exchange and hence subject .to rulings of the California Commissioner of Corporations. On February 22, 1973, the Commissioner issued notice that the West Coast Commodities Exchange had classified all commodity options as securities and suspended trading in these options pending their registration as such. Compliance with this ruling dictated that Continental Commodities and Continental Commodities Trading Company cancel each option that they had underwritten and take steps to mollify their disappointed customers. Since from its inception until February 22, 1973, the Dallas office had attracted approximately 80 customers with 40 open accounts and the Los Angeles office had attracted approximately 40 customers with 20 open accounts, the appeasement efforts required of Continental Commodities were substantial. The failure of these efforts left disgruntled customers whose affidavits appear invthe abbreviated record.

The complaint filed by the SEC asserted that jurisdiction could be grounded upon one of two bases. The first base was the trading enterprise itself, the second, promissory notes issued as partial reimbursement to customers who held open accounts with Continental Commodities at the time trading was suspended.

The trading enterprise extended the opportunity to invest in commodities futures contracts. Continental Commodities undertook to recommend certain commodities futures contracts to its customers. An interested customer would first be issued an option, guaranteeing him the right to purchase the contract at a stated price, with the option to remain open for a specified period of time. Continental Commodities neither owned the underlying futures contract nor es-crowed any portion of the customer payments for the purpose of acquiring such contracts. In addition, Continental Commodities undertook to advise a customer of the most opportune moment either to sell or to exercise the option. Finally, it also offered investment counseling as to the most propitious time to sell a specific futures contract.

The complaint alleged that several fraudulent acts were committed in connection with the discretionary trading accounts and particular options on futures contracts. Among these were that Continental Commodities misrepresented the lucrativeness of trading in commodities futures and the amount of reserve it had on deposit in a bank to cover for the money invested in such futures, and in specific instances of counseling as to when to exercise options, that it misrepresented the then current market price of the underlying commodity futures contract.

The second potential base for finding subject matter jurisdiction was that, upon receiving notification that trading on options was suspended, Continental •Commodities issued promissory notes to some of its customers as partial reimbursement. Although the record is somewhat obscure as to the precise number of recipients and the maturity date of the notes, it would appear that the notes were ostensibly non-interest bearing, with a maturity date of less than 9 months, and were issued to more than a nominal number of customers.

The complaint, as amplified by verified affidavits before the district court, alleges that the notes represented 40% of the amount of money owed to a customer, and that before issuing them, Continental Commodities exacted a promise of forbearance from legal action if payments were made as promised. Charles Long is alleged to have informed customers that the SEC had frozen his accounts, valued at $3,000,000 and thereby precluded him from paying off the debts owed by Continental Commodities, and to have indicated that the SEC would permit the company to remain in business if it would return 60% of the investors’ original investments immediately and give promissory notes for the balance. Moreover, the record contains a letter written by Charles Long to a customer expressing Long’s hope that Continental Commodities would square its accounts, register its options, and resume trading again. This letter tends to belie Long’s testimony that there was “no way” Continental Commodities could stay in business, and is buttressed by an affidavit submitted by an SEC attorney to the effect that Long had issued the notes in order to leave himself with enough cash to sue the West Coast Commodities Exchange and possibly register options should it become necessary.

Having recounted the facts which spawned this litigation and which were before the district court in its ruling on the SEC’s motion for a preliminary injunction, it is critical to take cognizance of the procedural labyrinth traversed by the parties below and on appeal. As we noted earlier, the complaint filed by the SEC posited two theoretical bases for subject matter jurisdiction — that both the scheme for trading on discretionary accounts and the notes issued were securities. The latter argument was somewhat ill-framed, and hence in its April 9, 1973 order denying the motion for a preliminary injunction, the district court merely addressed and rejected the SEC’s contention that the scheme of trading on discretionary accounts amounted to an investment contract. Subsequently, the SEC sought a rehearing due to the failure of the court to consider the contention that the notes were securities within the definitions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The district court disposed of this motion on May 3, 1973, ruling that the notes issued by Continental Commodities were not subject to the abuses sought to be curbed by the Acts and hence did not fall within their ambit.

On appeal, the SEC seeks to preserve only its contention that the notes were securities. In its brief, the SEC informs us that assuming a favorable ruling on appeal, it will move for a permanent injunction and may then resurrect the investment contract theory. We are, however, reluctant to condone the use of tactical legerdemain when such is designed to bridle an appellate court in its resolution of a case. The issue of whether trading on discretionary accounts amounts to an investment contract was vigorously contested below and was addressed at some length by the district court. Its disposition rested essentially on its perception of the legal contours of the definition of investment contract, and one of the prerequisites subsumed within it — the requirement of a common enterprise. Thus, while not impervious to the hazards of deciding a case on a basis not contested on appeal, we think that this case is particularly appropriate for such an approach. Accordingly, we address both the investment contract and note issues.

II

[I] As we noted earlier, the district court rejected the SEC’s contention that the trading in discretionary commodities accounts engaged in by Continental Commodities fell within the ambit of the term security, as defined by the Securities Act of 1933 and the Securities Exchange Act of 1934. The definitional sections of the two Acts, which are substantially identical, Tcherepnin v. Knight, 389 U.S. 332, 335-336, 88 S.Ct. 548, 552-553, 19 L.Ed.2d 564, 569 (1967), stipulate that the term security includes an investment contract. See 15 U.S.C. § 77b(1) and 15 U.S.C. § 78c(a)(10). The district court correctly concluded that SEC v. W. J. Howey Co., 328 U.S. 293, 298-299, 66 S.Ct. 1100, 1102-1103, 90 L.Ed. 1244, 1249 (1946) expresses the controlling standard for determining whether an investment contract exists. There, the Court stated that:

“[A]n investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.

As was noted in SEC v. Koscot Interplanetary, Inc., 497 F.2d 473, p. 477 (5th Cir. 1974) [No. 73-2339], this test subsumes within it three elements: first the existence of an investment of money; second, that the scheme functions as a common enterprise; and third, that profits of the enterprise are derived solely from the efforts of others. It was the asserted absence of the second element that prompted the district court to hold that an . investment contract did not exist.

Following the Seventh Circuit’s reasoning in Milnarik v. M-S Commodities, 457 F.2d 274 (7th Cir.), cert. denied, 409 U.S. 887, 93 S.Ct. 113, 34 L.Ed.2d 144 (1972), and that contained in Wasnowie v. Chicago Bd. of Trade, 352 F.Supp. 1066 (M.D.Pa.1972), aff’d without opinion, 491 F.2d 752 (3d Cir.), cert. denied, -- U.S. -, 94 S.Ct. 2407, 40 L.Ed.2d 773 (1974), the district court deemed the requisite commonality absent for two reasons: first, because each individual invested in different options, the accounts of individual investors were unrelated; and second, there was no understanding or expectation that investors would share in a common fund comprised of the returns on their investments. These reasons constituted the very impediments to a finding of commonality in Milnarik. There, as here, M-S Commodities held numerous discretionary accounts for trading in commodities futures. In holding that no investment contract was presented the Seventh Circuit stated:

“Although the complaint does allege that Nelson entered into similar discretionary arrangements with other customers, the success or failure of those other contracts had no direct impact on the profitability of plaintiff’s contract. Nelson’s [an agent of M-S Commodities] various customers were represented by a common agent, but they were not joint participants in the same investment enterprise.”

457 F.2d at 276-277. Were this view compatible with pronouncements of the Supreme Court and this Circuit, then the district court’s reasoning would be compelling. However, we cannot accept the Milnarik view.

In SEC v. Koscot Interplanetary, Inc., supra, this court decried a litmus application of the Howey test and expressed its preference for a resilient standard which would comport with the uniformly acclaimed remedial purposes of the Securities Act of 1933 and the Securities Exchange Act of 1934. While primarily concerned with explicating the contours of the “solely from the efforts of others” element, we had occasion to consider the parameters of the common enterprise element as well. There, we endorsed the Ninth Circuit’s formulation that “ ‘ [a] common enterprise is one in which the fortunes of the investor are interwoven with and dependent upon the efforts and success of those seeking the investment or of third parties’,” SEC v. Koscot Interplanetary, Inc., supra at 478, quoting SEC v. Glen W. Turner Enterprises, 474 F.2d 476, 482 n. 7 (9th Cir.), cert. denied, 414 U.S. 821, 94 S.Ct. 117, 38 L.Ed.2d 53 (1973), and remonstrated that “[t]he critical factor is not the similitude or coincidence of investor input, but rather the uniformity of impact of the promoter’s efforts.” SEC v. Koscot Interplanetary, Inc., supra at 478.

Accordingly, although in the Koscot scheme of multi-level distributorships, wherein each investor’s profit materialized only when the prospects he attracted to Opportunity Meetings and Go-Tours enlisted as distributors or sub-distributors with Koscot, this court nevertheless deemed the requisite commonality to be present:

“[T]he fact that an investor’s return is independent of that of other investors in the scheme is not decisive. Rather, the requisite commonality is evidenced by the fact that the fortunes of all investors are inextricably tied to the efficacy of the Koscot prospects and consummating a sale.”

SEC v. Koscot Interplanetary, Inc., supra at 479. This language expressly rejects the proposition that the pro-rata sharing of profits is critical to a finding of commonality, accord, Blackwell v. Bentsen, 203 F.2d 690, 691-692 (5th Cir. 1953), cert. dismissed, 347 U.S. 925, 74 S.Ct. 528, 98 L.Ed. 1078 (1954); SEC v. Glen W. Turner, Inc., supra at 482; Marshall v. Lamson Bros. & Co., 368 F.Supp. 486, 489 (S.D.Iowa 1974); Maheu v. Reynolds & Co., 282 F.Supp. 423, 429 (S.D.N.Y.1967), and easts aspersions on the elevation of a pooling ingredient to exalted status in inquiries concerning a common enterprise. For clearly, in the Koscot scheme, the independence of investor return followed from the independence of each investor’s nominal effort in contributing to the materialization of a return. Thus, we cannot accept the district court’s view that Continental Commodities did not function as a common enterprise because it invested in different options on commodities futures for some investors than it did for others. Were congruity of investment a prerequisite, then unlike the Koscot scheme, an enterprise would invariably either operate by pooling of investments or remunerate its customers by pro-rata sharing of profits.

Rather, as in SEC v. Koscot Interplanetary, Inc., supra, the critical inquiry is confined to whether the fortuity of the investments collectively is essentially dependent upon promoter expertise. Continental Commodities renders investment counseling concerning which option on commodities futures to invest in, when to sell or exercise the option, and if the option is exercised, when to sell the specific futures contract. Lacking the business acumen possessed by promoters, investors inexorably rely on Continental Commodities’ guidance for the success of their investment. This guidance, like the efficacy of Koscot meetings and guidelines on recruiting prospects and consummating a sale, is uniformly extended to all its investors. That it may bear more productive fruits in the case of some options than it does in cases of others should not vitiate the essential fact that the success of the trading enterprise as a whole and customer investments individually is contingent upon the sagacious investment counseling of Continental Commodities. This conclusion comports with the resilient approach this court adopted to the “solely from the efforts of others” element in SEC v. Koseot Interplanetary, Inc. and the similar approach to the common enterprise element which that decision presaged.

Ill

The second question for consideration is whether the notes issued by Continental Commodities in partial reimbursement to its customers upon the suspension of trading in unregistered commodities futures options are embraced by the Securities Act of 1933 and the Securities Exchange Act of 1934 and hence constitute an alternative basis of subject matter jurisdiction. Section 77b(1) of the ’33 Act stipulates that unless the context otherwise requires, “the term ‘security’ means any note. . . .” Section 77e(a) exempts from the ’33 Act’s registration provisions, at issue in the charges under 15 U.S.C. § 77e(a) & (c):

“(3) Any note, draft, bill of exchange, or banker’s acceptance which arises out of a current transaction or the proceeds of which have been or are to be used for current transactions, and which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.”

The definitional section of the term security in the 1934 Act, 15 U.S.C. § 78c(a) states that unless the context otherwise requires,

“(10) The term ‘security’ means any note . . . but shall not include any note . . . which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.”

The record indicates that some of the notes issued by Continental Commodities were to mature in less than nine months. Hence we must determine initially whether the reimbursement notes issued by Continental Commodities are the type of notes sought to be regulated by the Acts and whether their maturity dates bring them within the registration exemption in the ’33 Act and within the definitional exemption of the ’34 Act.

We must also consider whether the transactions in which these notes were issued satisfy the additional jurisdictional prerequisites of the Acts. Sanctions under the ’33 Act are triggered by a sale or offer to sell a security. See 15 U.S.C. §§ 77e(a) and (c) and 77q(a). The ’33 Act defines the terms sale or sell to “include every contract of sale or disposition of a security or interest in a security, for value.” See 15 U.S.C. § 77b (3). Under the ’34 Act, and section 10(b), the SEC must establish not only that the notes were the subject of a sale, defined by 15 U.S.C. § 78c(a) (14) to “include any contract to sell or otherwise dispose of,” but also that Continental Commodities engaged in fraud “in connection with the purchase or sale of any security.” 15 U.S.C. § 78j(b). We address these issues seriatim.

A. Notes as Securities

As the foregoing discussion indicates, the treatment extended to notes under the two Acts, while not precisely the same, is virtually identical. See Bellah v. First National Bank of Hereford, 495 F.2d 1109, 1112 (5th Cir. 1974); Zeller v. Bogue Electric Manufacturing Corp., 476 F.2d 795, 799-800 (2d Cir. 1973); Anderson v. Francis I. duPont & Co., 291 F.Supp. 705, 708 (D.Minn. 1968). The following analysis proceeds from this discernible similitude of the Acts.

Taking their cue from the Supreme Court’s pronouncement that “‘[ijnstruments may be included within any of [The Acts’] definitions, as a matter of law, if on their face they answer to the name or description,’ ” Tcherepnin v. Knight, 389 U.S. 332, 339, 88 S.Ct. 548, 555, 19 L.Ed.2d 564, 571 (1967), quoting SEC v. C. M. Joiner Leasing Corp., 320 U.S. 344, 351, 64 S.Ct. 120, 123, 88 L.Ed. 88, 93 (1943), most courts have countenanced a literal reading of the definition of security to the extent that almost all notes are held to be securities. See Rekant v. Desser, 425 F.2d 872, 878 (5th Cir. 1970); Lehigh Valley Trust Co. v. Central National Bank of Jacksonville, 409 F.2d 989, 991-992 (5th Cir. 1969); Joseph v. Norman’s Health Club, 336 F.Supp. 307, 313 (E.D.Mo.1971). Such a literal reading is compatible with the acknowledged policy of strictly construing exemptions from the coverage of the Acts. See SEC v. Ralston Purina Co., 346 U.S. 119, 126, 73 S.Ct. 981, 985, 97 L.Ed. 1494, 1499 (1953); Hill York Corp. v. American International Franchises, Inc., 448 F.2d 680, 689 (5th Cir. 1971). However, it should not be employed to frustrate the spirit or intention of Congress in promulgating the Acts.

That the notes issued by Continental Commodities possess a maturity date of less than nine months is not dispositive. This court intimated as much in United States v. Rachal, 473 F.2d 1338 (5th Cir. 1973), where in a case involving the exemption from registration for short-term notes, we approved the following instruction given by the trial court:

“This exemption was intended by Congress to cover that type of commercial paper available for discount at a Federal Reserve Bank, not generally sold to the public or advertised for public sale. It applies only to such notes, usually high quality commercial paper, as arise out of current transactions and are hence covered by assets readily convertible into cash. The exemption does not apply to common capital stock or an instrument which has the characteristics of such stock generally, regardless of what other characteristics it may have.” (emphasis added)

473 F.2d at 1343. Underlying our approval was the premise that the Acts’ exemptions for notes extend only to commercial paper, not investment paper. This premise has received increasing acceptance, as indicated by the number of cases rejecting the proposition that notes of less than 9 months maturity are per se exempt from the registration provisions of the ’33 Act and the definitional section of security appearing in the ’34 Act. See Zeller v. Bogue Electric Manufacturing Corp., supra at 800; Sanders v. John Nuveen and Co., Inc., 463 F.2d 1075, 1080 (7th Cir.), cert. denied, 409 U.S. 1009, 93 S.Ct. 443, 34 L.Ed.2d 302 (1972); SEC v. Vanco, Inc., 283 F.2d 304 (3d Cir. 1960), aff’g, 166 F.Supp. 422, 423 (D.N.J.1958); United States v. Hill, 298 F.Supp. 1221, 1226-1227 (D.Conn.1969); Anderson v. Francis I. duPont & Co., supra at 708-709. Additional testimony to its approval is supplied by courts which deem the commercial-investment dichotomy as implicit within the “unless the context otherwise requires” prefatory language of 15 U.S.C. §§ 77b(1) and 78c(a)(10), see Lino v. City Investing Co., 487 F.2d 689, 694-695 (3d Cir. 1973); Joseph v. Norman’s Health Club, Inc., supra at 313, and those courts which read the dichotomy into the definitional sections without positing a precise derivational source. See Davis v. Avco Corp., 371 F.Supp. 782, 787 (N.D.Ohio 1974); SEC v. Thunderbird Valley, Inc., 356 F.Supp. 184, 188 (D.S.D.1973); McClure v. First National Bank of Lubbock, Texas, 352 F.Supp. 454, 457-458 (N.D.Tex.1973). And it was this impressive line of cases which led this court to hold that the exemption for short-term notes under the Securities Exchange Act of 1934 applied only to commercial and not investment paper in Bellah v. First National Bank of Hereford, supra. Accordingly, it is the character of the note, not its maturity date, which determines coverage under both the registration provisions of the Securities Act of 1933, and the Securities Exchange Act of 1934.

The above quoted instruction approved in United States v. Rachal, supra, largely reflects the SEC’s position concerning the exemption from the ’33 Act’s registration provisions. Securities Act.Rel.No.4412, 26 Fed.Reg. at 9159. This release, instructive as to the ’34 Act’s definition of a note, see Bellah v. First National Bank of Hereford, supra at 1112 n. 3; Zeller v. Bogue Electric Manufacturing Corp., supra at 800, sets forth four factors which underscore the commercial-investment dichotomy of notes. These factors are that the notes are (1) of prime quality; (2) used to finance current transactions; (3) not offered to the public; and (4) discountable at a Federal Reserve Bank. While the precise meaning of these criteria has not been extensively addressed by the courts, see Comment, The Commercial Paper Market & The Securities Acts, 39 U. of Chicago L.Rev. 362, 381 (1972), it would appear that notes issued by a company or individual in precarious financial straits are not either prime quality, issued to facilitate current transactions, of eligible for discounting by Federal Reserve Banks. See Sanders v. John Nuveen & Co., Inc., supra at 1079; United States v. Hill, supra at 1227. Continental Commodities’ impecunious condition, as witnessed by the fact that its customers were left unsatisfied by the issuance of the notes, would thus dispel the suggestion that the notes it issued fall within the four criteria and hence the characterization of commercial paper which the criteria adumbrate.

Although the SEC release is entitled to great weight, it is not dispositive, see SEC v. Koscot Interplanetary, supra at 483 n. 14; Zeller v. Bogue Electric Manufacturing Corp., supra at 800, and hence the conclusion that the term “security” embraces the Continental Commodities notes need not rest on an application of the factors contained in the SEC release alone. Rather, it is appropriate and preferable to consider and apply the judicially assessed characteristics ascribed to commercial and investment paper.

The paramount concern in this inquiry is upon the nature of the transaction in which the note is issued. In Lino v. City Investing Co., supra, the Third Circuit dismissed on jurisdictional grounds a suit brought under various registration and anti-fraud provisions of the Acts by a purchaser of a franchise sales center license for which promissory notes had been given to the franchisor in partial payment. After observing that there was no indication that the franchisor was soliciting venture capital, the court stated:

“In no way could City Investing be said to have ‘purchased’ Lino’s notes for speculation or investment. City Investing was selling a contract right to Lino, not buying his security. It simply lacks common sense to describe the transaction as City Investing purchasing John Lino’s security by paying him the right to operate one of its Franchise Sales Centers.”

487 F.2d at 695. Thus, the Third Circuit concluded that City Investing Company accepted the note, not to invest in Lino’s franchise, but to enable the franchise to be financed. See also SEC v. Fifth Avenue Coach Lines, Inc., 289 F.Supp. 3, 13, 38 (S.D.N.Y.1968), aff’d on other grounds, 435 F.2d 510 (2d Cir. 1970) (notes issued by director and officer of corporation to corporation to enable it to meet current business obligations treated as personal loans); City Nat’l Bank v. Vanderboom, 290 F.Supp. 592 (W.D.Ark.1968), aff’d, 422 F.2d 221 (8th Cir.), cert. denied, 399 U.S. 905, 90 S.Ct. 2196, 26 L.Ed.2d 560 (1970) (note issued to bank in exchange for a loan, the proceeds of which were subsequently used to purchase stock of a corporation, treated as not within the Acts); Joseph v. Norman’s Health Club, Inc., supra (notes issued by purchasers of lifetime memberships in health clubs are commercial notes). But see MacAndrews & Forbes Co. v. American Barmag Corp., 339 F.Supp. 1401 (D.S.C.1972) (bills of exchange issued by purchaser of machines held to be securities). In this sense, City Investing Company extended financing in much the same way that a bank does in a private loan transaction, and in the latter situation, a note received by the bank does not easily lend itself to characterization as investment paper. See Sanders v. John Nuveen & Co., supra at 1080 (dicta); McClure v. First National Bank of Lubbock, supra. Such was the import of our decision in Bellah v. First National Bank of Hereford, supra, where we held that loans extended by a bank to enable the Bellahs to finance a livestock business were private in nature, and hence that a note issued to the bank in exchange was commercial and not investment paper. In Bellah, there was no evidence in the record to suggest that the bank proffered the loan in hopes of realizing a return commensurate with the success of the Bellah’s livestock enterprise.

Illustrative of the transactions in which a note is deemed to be investment paper is Zeller v. Bogue Electric Manufacturing Corp., supra. Zeller, a shareholder in Belco Pollution Control Corp. (Belco), brought a derivative action against Bogue Electric Manufacturing Corp. (Bogue) its parent corporation, alleging as grounds therefor that Bogue had caused Belco to loan money to Bogue on terms that were purportedly unfair. The individual protagonists, directors and accountants of both parent and subsidiary, had caused Belco to make a series of open account loans to Bogue for which no interest was required to be paid. Over a year later, the open account indebtedness was supplanted by a demand interest bearing note, collateralized by shares of Belco stock owned by Bogue. While the opinion of the Second Circuit does not reveal the reason why the note was issued at this time, it does indicate that the initial loan was prompted by operating losses suffered by Bogue. Thus, the loan constituted an attempt to return Bogue to a position of financial viability. And to the extent that this restoration of Bogue would rebound to Belco’s benefit, Belco’s supplying of money on open account constituted not a private commercial loan but an investment. Accordingly the court held that since the note if issued at the time of the initial loan would have been a security, it was also a security even though its issuance was delayed. See 476 F.2d at 800.

The analogies between Zeller and the instant case compel us to conclude that the notes issued by Continental Commodities were investment and not commercial in nature. Despite unrelenting arguments by Continental Commodities to the contrary, it is apparent from a review of the record that the notes were issued to rejuvenate and not to liquidate the enterprise. Affiants Thomas M. Cain, Jr. and Bob Doss claimed that they had been apprised by Charles Long that upon reimbursement of its customers in part with cash and in part with the notes, Continental Commodities would be permitted to remain in business by the SEC. Similarly, the record contains a letter written to customer Milton Young in which Long states: “We hope that in a short period of time we are able to register our options as securities and begin selling options again.” Finally, affiant Wayne M. Whitaker, a staff attorney with the Fort Worth Regional Office of the SEC, related the substance of Long’s explanation, for the payment scheme in an interview as follows: “Long stated that he does have funds to pay in full the customer’s original investments, but that he is only offering a 60% immediate refund and a note for the remaining 40% to certain large customers in order to leave him with enough cash to sue the West Coast Commodity Exchange and possibly register the options should it become necessary.” To the extent that the district court’s disposition may have rested on the finding that the notes issued by Continental Commodities were designed to liquidate the enterprise, the aforementioned evidence establishes and we conclude that this finding was clearly erroneous.

Once the resuscitative nature of the notes is established, the conclusion is ineluctable that the notes were investment and not commercial paper. Since revival would inure to their benefit, recipients accepted the notes with the hope of realizing a greater return on their investments. To this extent the recipients here were in' a position akin to that of the Belco shareholders in Zeller v. Bogue Electric Manufacturing Corp., supra.

B. Additional Jurisdictional Prerequisites

The final question for review is whether for purposes of the ’33 Act, Continental Commodities’ issuance of the notes constituted a sale or disposition of a security for value and whether for purposes of the ’34 Act, the notes were sold and whether there was any fraud in connection with the sale of such notes. We address the sale aspect under both the Acts, and then turn to the “in connection with” requirement under section 10b alone.

We begin by noting that the meaning of the terms “sale” and “purchase and sale” under different sections of the Acts may vary. See SEC v. National Securities, Inc., 393 U.S. 453, 466, 89 S.Ct. 564, 571, 21 L.Ed.2d 668, 679-680 (1968); International Controls Corp. v. Vesco, 490 F.2d 1334, 1343 n.8 (2d Cir.), cert. denied,-U.S.-, 94 S.Ct. 2644, 40 L.Ed.2d - (1974). Amenability of particular securities to these terms is determined by whether the transactions in which the securities are issued are subject to the abuses sought to be eliminated by the individual Acts. The purpose of the registration provisions of the ’33 Act is to provide adequate disclosure to members of the investing public, e. g. SEC v. North American Research & Development Corp., 424 F.2d 63, 71 (2d Cir. 1970); SEC v. Harwyn Industries Corp., 326 F.Supp. 943, 954 (S.D.N.Y.1971), and that of the section 10(b), to protect investors from the use of manipulative or deceptive devices in securities transactions. See Sargent v. Genesco, Inc., 492 F.2d 750, 760 (5th Cir. 1974); Smallwood v. Pearl Brewing Company, 489 F.2d 579, 590 (5th Cir. 1974). Under both Acts, the definitions of the term sale are broad. Compare, e. g., Superintendent of Insurance v. Bankers Life & Casualty Co., 404 U.S. 6, 12, 92 S.Ct. 165, 169, 30 L.Ed.2d 128, 134 (1971) and International Controls Corp. v. Vesco, supra at 1343 with e. g., Collins v. Rukin, 342 F.Supp. 1282, 1288 (D.Mass.1972).

Continental Commodities claims that the issuance of the notes did not constitute a sale under either Act essentially because it did not receive any value from the recipients. But an examination of the record reveals that an agreement to forbear bringing legal action was a condition exacted by Continental Commodities for the issuance of the notes. The text of a telegram from customer Gerald Rubman to Charles Long is illustrative: “Gentlemen it is understood that as a condition of withholding legal action, I am to receive within seven days a check for sixty percent of my deposit together with a promissory note for the balance of funds due and payable me [sic].” And as the affidavits alluded to above indicate, Continental Commodities represented that by issuing the notes, it bought not only SEC permission to continue operating, but also time within which it could sue the West Coast Commodities Exchange, seeking a reversal of its prohibition against trading on unregistered commodities options.

The question of whether in these circumstances a sale was effected under the relevant portions of the Acts is one yet to be addressed by the courts. An affirmative response seems to be suggested by two vintage cases involving suits for unlawful insider trading where courts held sales to have been effected where securities were issued in payment for past debts. See Blau v. Albert, 157 F.Supp. 816, 820 (S.D.N.Y.1957); Smolowe v. Delendo Corp., 46 F.Supp. 758, 763 (S.D.N.Y.1942), aff’d, 136 F.2d 231 (2d Cir.), cert. denied, 320 U.S. 751, 64 S.Ct. 56, 88 L.Ed. 446 (1943). Moreover, in Zeller v. Bogue Electric Manufacturing Corp., supra, the Second Circuit apparently did not deem the absence of tangible consideration flowing from Belco to Bogue concomitant with the issuance of the note to be an impediment to jurisdiction. This conclusion can be supported under the reasoning that the initial open account loans extended by Belco constituted the requisite return to Bogue for the note it subsequently issued — reasoning equally appropriate here.

We would also note that Continental Commodities most assuredly would be deemed to have engaged in a sale had it issued promissory notes not to its customers but to other members of the investing public and applied the proceeds to its customer indebtedness. The net effect of this hypothetical transaction and the instant transaction is the same —time is bought hopefully to enable the enterprise to revive itself. The potential jeopardy to the salutary purposes of the registration and anti-fraud provisions by a conclusion that a sale did not take place in either transaction is the same. To hold that the instant facts did not constitute a sale would thus be tantamount to condoning the view that one can not circumvent these provisions of the Acts directly but can do so indirectly.

We also hold that for-jurisdictional purposes, the requisite fraud in connection with the sale or purchase of a security has been alleged. The complaint charges that Continental Commodities made several fraudulent representations at the time the notes were issued, inter alia, that the SEC had frozen $3,000,000 of Continental Commodities money and had approved its remuneration plan. It also charges that Continental Commodities misrepresented the amount of money it had on reserve to back investments at the time customers initially invested in commodities options. This latter alleged misstatement can be considered as having a continuing effect up to and beyond the time the notes were issued. Accordingly these purported misrepresentations fall clearly within the “in connection with” requirement, as adumbrated in Superintendent of Insurance v. Bankers Life & Casualty Co., supra, Sargent v. Genesco, Inc., supra, and Smallwood v. Pearl Brewing Co., supra.

IV

To reiterate, we hold only that the record before the district court on the SEC’s motion for a preliminary injunction was sufficient to establish jurisdiction under the Securities Act of 1933 and the Securities Exchange Act of 1934. We intimate no view as to the verity of the SEC’s assertions of fraud' or the wisdom of issuing a preliminary injunction. Accordingly, this cause is reversed and remanded with instructions to consider the propriety of granting a preliminary injunction and other appropriate relief.

Beversed and remanded.

      . To facilitate ease of understanding, the defendants-appellees shall be referred to collectively as Continental Commodities, except as to those transactions where the retention of their separate identities is of significance to this inquiry..

      . The relevant portions of 15 U.S.C. § 77e (1970) provide:
      “(a) Unless a registration statement is in effect as to a security, it shall be unlawful for any person, directly or indirectly—
      (1) to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell such security through the use or medium of any prospectus or otherwise; or
      (2) to carry or cause to be carried through the mails or in interstate commerce, by any means or instruments of transportation, any such security for the purpose of sale or for delivery after sale.
      * * * 5!: *
      (c) It shall be unlawful for any person, directly or indirectly, to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell or offer to buy through the use or medium of any prospectus or otherwise any security, unless a registration statement has been filed as to such security, or while the registration statement is the subject of a refusal order or stop order or (prior to the effective date of the registration statement) any public proceeding or examination under section 77h of this title.”
      15 U.S.C. § 77q (1970) provides that:
      “(a) It shall be unlawful for any person in the offer or sale of any securities by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly—
      (1) to employ any device, scheme, or artifice to defraud, or
      (2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, hot misleading, or
      (3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.”

      . 15 U.S.C. § 78j (1970) :
      “It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange—
      (b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.”
      17 C.F.R. § 240.10b-5 states that:
      “It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
      (a) To employ any device, scheme, or artifice to defraud,
      (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
      (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.”

      . We intimate no view as to whether the SEC would be entitled to the issuance of the preliminary injunction under the standards announced in Canal Authority of the State of Florida v. Callaway, 489 F.2d 567 (5th Cir. 1974).

      . The subject matter of the options on commodities futures contracts was varied, extending to silver, sugar, coffee, platinum, plywood and cocoa.

      . Additional alleged misrepresentations concerned the qualifications and experience of the management of the issuer, the existence of SEC approval of the issuer’s method of operation, the nonadverseness of financial interests of the issuer and the investor, the likelihood of increase in the market value of the securities being issued, and the use of proceeds received from purchasers of the issuer’s securities.

      . In its brief filed on appeal the SEC states that when it moves for a permanent injunction, it will be upon a more extensive record unless the district court should conclude on remand that its jurisdiction with respect to the notes is a sufficient predicate for granting all the requested relief.

      . That there is no jurisdictional bar to our consideration of the investment contract issue is evidenced by the Supreme Court’s ruling in United States v. Philadelphia National Bank, 374 U.S. 321, 350 n. 20, 83 S.Ct. 1715, 1734, 10 L.Ed.2d 915, 937 (1903) where the Court considered whether the Bank Merger Act insulated approved mergers from attack as violative of antitrust laws, despite the abandonment of this issue on appeal. See also United States v. Western Pacific Railroad Company, 352 U.S. 59, 63, 77 S.Ct. 161, 164, 1 L.Ed.2d 126, 131 (1956).

      . It is important to be mindful of the distinction between trading on discretionary accounts and the actual commodities futures contract. Courts are in general agreement that a particular commodities futures contract is not an investment contract. Berman v. Dean Witter & Co., Inc., 353 F.Supp. 669, 671 (C.D.Cal.1973); Schwartz v. Bache & Co., Inc., 340 F.Supp. 995, 998-999 (S.D.Towa 1972); Berman v. Orimex Trading, Inc., 291 F.Supp. 701, 702 (S.D.N.Y.1968); Sinva v. Merrill Lynch, Pierce, Fenner & Smith, 253 F.Supp. 359, 360-367 (S.D.N.Y.1966).

      . We recognize that the district court did not have the benefit of our opinion in SEC v. Koscot Interplanetary, Inc., supra, in reaching its conclusion.

      . In its opinion the district court did not consider the proliferating number of cases adopting the contrary view. See Marshall v. Lamson Bros. & Co., 368 F.Supp. 486, 489—490 (S.D.Iowa 1974); Johnson v. Arthur Espey, Shearson, Hammill & Co., 341 F.Supp. 764, 765 (S.D.N.Y.1972); Berman v. Orimex Trading, Inc., supra; Anderson v. Francis I. duPont & Co., 291 F.Supp. 705, 709 (D.Minn.1968); Maheu v. Reynolds, 282 F.Supp. 423, 426 (S.D.N.Y.1967).

      . Commentators are in general agreement that promoter dominance of the enterprise provides sufficient commonality and hence that pro-rata distribution of all profits is not required. See I. L. Loss, Securities Regulation 489 (2d Ed.1961); Coleman, A Franchise Agreement: Not A “Security” Under the Securities Act of 1933, 22 Bus. Law 493, 502-09 (1967); Borton & Abrahams, Options on Commodity Futures Contracts as Securities in California, 29 Bus. Law 867, 872 (1974); Note, Securities Regulation of Pyramid Schemes, 51 Tex.L.Rev. 788, 793 (1973); Note, Pyramid Schemes: Dare to Be Regulated, 61 Geo.L.J. 1257, 1277 (1973); cf. Comment, Pyramid Marketing Plant & Consumer Protection: State & Federal Regulation, 21 J. of Public Law 445, 470 (1972).

      . At oral argument, counsel for Continental Commodities virtually withdrew the contention that the SBC had failed to prove that the issuance of notes was facilitated by use of any means or instruments of transportation or communication in interstate commerce. Accordingly, we do not consider this question.

      . The release provides as follows :
      “The legislative history of the Act makes clear that section 3(a)(3) applies only to prime quality negotiable paper of a type nor ordinarily purchased by the general public, that is, paper used to facilitate well recognized types of current operational business requirements and of a type eligible for discounting by Federal Reserve banks.”
      This position tracks in part the description of exempted notes appearing in H.R.Rep. No.85, 73d Cong., 1st Sess. 15 (1933). The release, and its support in the legislative history of the Acts is discussed extensively in Comment, The Commercial Paper Market and the Securities Acts, 39 U. of Chicago L. Rev., 362, 380-396 (1972).

      . At oral argument, counsel for Continental Commodities conceded that the notes were not of prime quality or capable of discounting at a Federal Reserve Bank. That the legislative history reflects that discountable paper was conceived of as paper with “a record of safety second only to Government bonds” see Hearings on S. 875 Before the Senate Comm, on Banking & Currency, 73rd Cong., 1st Sess. at 94, 95 (1933) would support the conclusion that the notes were not possessed of the requisite financial inviolability.
      Our conclusion on this score should not be read to undermine the observation in Bellah v. First National Bank of Hereford, supra, that under the release criteria, that Bellah’s lack of financial viability cannot metamorphize commercial paper into investment paper. This observation was confined to circumstances where the impecunious maker seeks to invoke the protections of the Act. Bellah v. First National Bank of Hereford, supra at 1112 n. 3. Accordingly, it is inapposite where, as here, the maker seeks to avoid the Act’s sanctions.

      . In view of the SEC’s disapprobation of this decision, we intimate no view as to its propriety. The SEC maintained that the Third Circuit overlooked the fact that the franchisor was seeking venture capital.

      . As our analysis indicates, we adopt as the relevant index, not whether what was contemplated did in fact materialize, but rather what was in fact contemplated by the investor and the promoter. Here, the investor was led to expect that his acceptance of the note would help to preserve the trading enterprise’s existence. That Continental Commodities may have been more sanguine than the facts warranted, or even misrepresented, its future, cannot alter the fact that it represented that the notes would enhance the enterprise’s operation.

      . Under the Zeller reasoning, payment by customers at the time they opened accounts, with Continental Commodities would constitute value. Our appraisal of the note issuance as a resuscitating and not liquidating transaction obviates any need to decide whether it is proper to consider the notes as a segment of one continuous transaction, the inception of which was at the time the trading accounts were opened. The Zeller disposition appears to tacitly endorse such a consideration.

      . In Sargent v. Genesco, supra at 763, this court construed Banker’s Life to establish that:
      “[T]he defendant’s fraudulent conduct need not specifically relate to the plaintiff’s securities as in a misrepresentation involving the value of securities purchased or sold by the plaintiff. Instead, the requisite nexus exists if such conduct merely touches upon the plaintiff’s purchase or sale.”


source: Caselaw Access Project

author: WISDOM, Circuit Judge:

license: Public Domain

text:
    Mrs. Harvey STANCILL, Plaintiff-Appellant, v. McKENZIE TANK LINES, INC., and Carriers Insurance Company, Defendants-Appellees.
    No. 73-3081
    Summary Calendar.

    United States Court of Appeals, Fifth Circuit.
    June 27, 1974.

      Floyd M. Buford, Macon, Ga., for plaintiff-appellant.
    Albert P. Reichert, Jr., G. Boone Smith, III, Macon, Ga., for defendantsappellees.
    Before WISDOM, AINSWORTH and CLARK, Circuit Judges.

       Rule 18, 5 Cir., Isbell Enterprises, Inc. v. Citizens Casualty Company of New York et al., 5 Cir., 1970, 431 F.2d 409, Part I.

   WISDOM, Circuit Judge:

In this diversity action, Mrs. Harvey Stancill appeals from a jury verdict in favor of the defendants-appellees, rendered after trial in the United States District Court for the Middle District of Georgia. The jury found that McKenzie Tank Lines, Inc. was not liable to Mrs. Stancill for the death of her parents caused by a collision between their pickup truck and a tank truck driven by a McKenzie employee, Jimmy Whitely. In support of her appeal, Mrs. Stancill alleges several grounds of error, including insufficiency of the evidence, improper consideration of the defendant’s counterclaim, inconsistent answers to the special interrogatories submitted to the jury, and improper admission of expert testimony offered by the defense. We affirm.

I

At about 4:30 P.M. on December 13, 1971, Jimmy Latrell Whitely, a truck driver employed by McKenzie Tank Lines, Inc., was proceeding North on U. S. Highway 441, a few miles south of Homerville, Georgia, in a tank truck owned by his employer. Driving conditions and visibility apparently were excellent. Highway 441 is a two-lane paved road, and was in a good state of repair, for it had been recently resurfaced. There was no center line.

As he approached the intersection of Highway 441 and Shiloh Road, Whitely observed a pick-up truck, travelling at about ten to fifteen miles per hour, enter Highway 441 from Shiloh Road and begin to make a left turn in front of him. The pick-up truck, driven by Obediah Carver, the appellant’s father, did not stop at the stop sign controlling access from Shiloh Road onto Highway 441, nor did it yield the right of way to the tank truck driven by Whitely. In an attempt to avoid striking the Carver vehicle, Whitely pulled into the left, or southbound lane, the lane the turning pick-up was entering. His attempt was unsuccessful, and his truck struck the left front side of the Carver truck, turning it completely around. Mr. Carver died instantaneously and Mrs. Carver, a passenger in the pick-up, died shortly thereafter. Although the tank truck swerved into a ditch and overturned, Whitely was only slightly injured.

Mrs. Stancill brought this action against McKenzie and its insurer to recover damages for the death of her parents, and McKenzie counterclaimed for the damage to the tank truck and the loss of its use. At trial, extensive evidence was introduced as to the point of impact, whether Whitely had had sufficient room in his own, or northbound, lane to avoid the accident, the speed of the vehicles, and the like. Based on this evidence, and in answer to special interrogatories, the jury concluded that both Whitely and Mr. Carver had been negligent, but that only Mr. Carver’s negligence was a proximate cause of the accident. The jury thus rendered a verdict for the defendants, but in answer to the interrogatory concerning damage to the truck, and its fair rental value, concluded that the appellee had not been damaged, and made no award on its counterclaim.

II

Mrs. Stancill’s first contention is that the district court erred in permitting McKenzie to introduce evidence in support of its counterclaim as to the damage to the truck driven by Whitely, and its fair rental value. Under Georgia law, the appellant urges, the counterclaim could not have been legally imposed against her, because the claim for damage to McKenzie’s truck was a debt of her parents’ estate and, therefore, cannot limit her right to recover for their wrongful death. See Georgia Code Annotated, Sections 105-1305, 113-1509 (1968). Since the evidence introduced in support of this improper counterclaim clearly confused and misled the jury, Mrs. Stancill argues, the error is prejudicial and mandates reversal.

We are by no means certain that a counterclaim of this type is the sort of “debt” which, under Section 105-1305, may not be asserted in a wrongful death action. Georgia does permit a lawsuit arising out of acts of a decedent to be brought against his heirs at law where there has been no administration of the estate. Hughes v. Cobb, Ga.Sup.1942, 195 Ga. 213, 23 S.E.2d 701, 703. Here, there had been no administration of the estate, and Mrs. Stancill was the only heir at law. Necessarily, a separate action brought by McKenzie would have named Mrs. Stancill as defendant. Thus, whether Georgia courts would endorse the unnecessary circuity that separate actions on these claims would entail is unclear; federal courts will not.

Indeed, such a multiplicity of actions is precisely the evil the federal approach to counterclaims was fashioned to avoid. See 6 C. Wright & A. Miller, Federal Practice and Procedure, Section 1409, at 37-38. Far from being improper, the counterclaim advanced by the appellees was compulsory. Had it not been advanced here, it would have been lost as a federal cause of action forever. See Wright & Miller, supra, at 37. A counterclaim is compulsory under the Federal Rules of Civil Procedure, “if it arises out of the transaction or occurrence that is the subject matter of the opposing party’s claims and does not require for its adjudication the presence of third parties of whom the court cannot acquire jurisdiction.” Fed.R.Civ.P. 13(a). As we noted above, Mrs. Stancill is the sole heir at law of her parents. Thus, only she and McKenzie Tank Lines were necessary parties to the counterclaim. It can hardly be doubted that a single occurrence is the wellspring of both the appellant’s and the appellee’s claims. The challenged counterclaim was properly asserted and the evidence supporting it properly introduced.

Mrs. Stancill also maintains that the jury was confused and misled by the presence of the counterclaim, but offers no evidence that the jury was improperly influenced by the testimony of the one witness who established McKenzie’s damages. Moreover, although she suggests that the interrogatories concerning the counterclaim confused the jury and may have affected its determination of the liability issues, we find no reason to believe this was the case. The form of the special interrogatories required the jury to respond to the negligence and causation issues before it considered the question of damages. Even had the counterclaim been improper, then, it could not have influenced the jury’s decision on the appellant’s complaint.

Ill

The contention to which we turn now is more complex, for Mrs. Stancill argues that the answers to several of the special interrogatories submitted to the jury are inconsistent with each other and with the general verdict, and that a new trial is required. More specifically, the appellant urges that the verdict denying any recovery to McKenzie Tank Lines, Inc., and the answers to Interrogatories 8 and 9, showing that McKenzie was not damaged, are inconsistent with the answers to Interrogatories 3 and 4 in which the jury found that Obediah Carver was negligent and that his negligence was the proximate cause of the collision. In the face of a finding of liability and an uncontested demonstration of damages, Mrs. Stancill maintains, McKenzie Tank Lines, Inc. should have received an appropriate monetary award. Thus, the failure of the jury to award damages to McKenzie gives rise to an impermissible inconsistency which, under Fed.R.Civ.P. 49(b), requires a new trial.

SPECIAL INTERROGATORIES
1. Was Jimmy L. Whitley guilty of any negligence? YES.
2. If so, was his negligence a proximate cause of the collision? NO.
3. Was Obediah Carver guilty of any negligence? YES.
4. If so, was his negligence a proximate cause of the collision? YES.
(Answer 5 only if you have answered both 2 and 4 in the affirmative).
5. Of the total negligence of 100% causing the collision, what percentage is attributable to Jimmy L. Whitley and what percentage is attributable to Obediah Carver? (No answer!■
(Answer 6 and 7 only if you have answered 1 and 2 in the affirmative).
6. What was the full value of the life of Obediah Carver? (No answer!,
7. What was the full value of the life of Tonnie Steedley Carver? (No answer!.
(Answer 8 and 9 only if you have answered both 3 and 4 in the affirmative).
8. What was the total damage to the tractor and trailer? Zero.
9. What was the fair rental value of the tractor during a reasonable time allowed for its repair? Zero.

Rule 49(b) does endorse a new trial as one option open to a trial court when an actual inconsistency does occur. But in determining whether Rule 49(b) requires a new trial in this case, a number of serious questions arise, not the least of which is whether an “inconsistency” exists at all. The answers are not inconsistent as a matter of logic: a finding that Mr. Carver’s negligence caused the accident is not inconsistent with a conclusion that McKenzie suffered no damages and, therefore, should receive no award. One or more of these answers may be erroneous, but they are not inconsistent.

This case is not analogous to those cited by the appellant, where, after finding the defendant’s conduct to have been nonnegligent or that both parties were at fault, the jury nevertheless proceeds to hold the defendant liable and award damages to the plaintiff. See Nordmann v. National Hotel Co., 5 Cir. 1970, 425 F.2d 1103; Welch v. Bauer, 5 Cir. 1951, 186 F.2d 1002. Such answers are legally and logically irreconcilable, hence truly inconsistent. What is involved here is not so much an allegation of inconsistency as one of inaccuracy; two of the jury’s answers, and its general verdict, though correct in legal theory, neglect to take cognizance of the uncontested facts as to the defendant’s damages. What must be determined, then, is whether this sort of “inconsistency” requires a new trial.

At least one decision of this Court holds that an incorrect verdict may be treated as analogous to an inconsistent one, and a new trial ordered on all issues. See Hatfield v. Seaboard Air Line Railroad Co., 5 Cir. 1968, 396 F.2d 721, 724. Three important factors distinguish Hatfield from this controversy, however, and convince us that a new trial is not required here.

First, the panel in Hatfield believed that the award of nominal damages there evidenced an improper jury compromise on the liability issue, “which could not help but affect the verdict as a whole”, 396 F.2d at 724, and accordingly ordered a new trial on all issues. Here, however, we are not persuaded by Mrs. Stancill’s assertion that the jury’s failure to award damages to McKenzie on its counterclaim necessarily signals a compromise. The jury’s conclusions as to negligence and causation are supported by the weight of the evidence. All of the jury’s answers make sense in light of the evidence adduced at trial except the refusal to compensate McKenzie for its uncontroverted damages. Although this may have resulted from the jury’s improper desire not to visit the negligence of her deceased father upon the appellant, there is nothing about the verdict which leads us to believe that it was the result of a compromise on the liability issues. More appropriate than a complete new trial, then, would seem to be a retrial limited to the issue of damages, the sole issue on which the jury plainly erred. See Parker v. Wideman, 5 Cir. 1967, 380 F.2d 433, 437.

This brings us to the second distinction between this case and Hatfield: here McKenzie, the only party which could benefit from a retrial on the damage issue, has not appealed. The jury’s findings in the first case as to liability would govern the second trial. Thus Mrs. Stancill, who has appealed, could not benefit from a trial on the damage issue alone. In such circumstances, a new trial will not be ordered to aid a nonappealing party.

A new trial as to any issue would be inappropriate for a third reason. By failing to object to the form of the verdict and answers at the time they were announced by the jury, both parties waived any objection to ineonsistencies under Rule 49(b). Employers Casualty Co. v. Dupaquier, 5 Cir. 1964, 338 F.2d 336, 337 (per curiam). The trial judge was careful to solicit objections from both counsel after the verdict was rendered and the interrogatories answered. He not only asked for objections before the jury, he called the attorneys to confer at the bench concerning possible objections. There were none. Had an objection been raised as to the consistency of the answers at that time, the district court could have elected to “return the jury for further consideration of its answers and verdict . . . .” Fed.R.Civ.P. 49(b). Having failed to raise this objection at trial, Mrs. Stancill cannot now assert it on appeal where the only option is a new trial. Confronted with no objection to the verdict or answers, it was not plain error for the district court to enter judgment upon the verdict as it did. Cf. Employers Casualty Co. v. Dupaquier, supra, at 337.

IV

Next the appellant objects to the admission of the testimony of Frank M. Flanigan, an expert witness on McKenzie’s behalf, on the ground that there was no foundation laid to justify its admission. She insists that the foundation was inadequate for three reasons: 1) Flanigan had never visited the scene of the accident nor examined the vehicles involved, but testified primarily from photographs and reports of other witnesses; 2) not all of the facts upon which his opinion was founded were admitted in evidence; 3) his opinion was based on the opinion of another expert.

Under Rule 43(a), Fed.R.Civ.P., federal courts must admit evidence that would be admissible under either federal or state standards. So viewed, the appellant’s first argument may be swiftly dispatched under Georgia law. In American Home Assurance Co. v. Stephens, Ga.App.1970, 121 Ga.App. 306, 174 S.E.2d 186, 188, the Georgia Court of Appeals permitted an expert who had neither been to the scene of the accident nor inspected the vehicles involved to give an opinion as to material facts concerning an automobile accident. The expert witness based his opinion on his study of photographs “and other considerations within the range of the evidence . . . .” The appellant concedes the import of this decision, but would have us distinguish it on the ground that here the expert’s testimony was based on photographs and other considerations not within the range of the evidence.

This is, of course, precisely Mrs. Stancill’s second contention: that since Flanigan “took into account” Corporal Collins’s deposition, and unsworn statements by Collins and Jimmy Whitely, none of which were introduced at trial, his opinion was not based on evidence in the record and could not properly be received. In evaluating such contentions, we must recognize that the admission or exclusion of expert testimony is a matter within the sound judicial’ discretion of the trial judge. Only if we determine that his decision is “manifestly erroneous” may we find that he has abused his discretion and that reversal is required. Salem v. United States Lines Co., 1962, 370 U.S. 31, 35, 82 S.Ct. 1119, 1122, 8 L.Ed.2d 313, 317; Scott v. Fancher, 5 Cir. 1966, 369 F.2d 842, 844. Seen in this perspective, the admission of Flanigan’s testimony clearly does not require reversal.

Although Flanigan testified that he did use Corporal Collins’s deposition and report, which were not in evidence, and Whitely’s statement which was also not offered, it is apparent that the facts upon which Flanigan’s opinion rested were in evidence, even if every document he referred to was not. It is also apparent from a reading of the transcript that Flanigan testified primarily from photographs of the vehicles and the scene of the accident. The other facts he relied upon, such as weather and road conditions, Whitely’s manner of braking the tank truck, and the nature of the gouges and scuff marks on the highway, were “in evidence”, having been testified to by Deputy Webb and Corporal Collins, the investigating officers, or by Whitely and James Pittman, the only living witnesses to the mishap. Under a voir dire cross-examination by the appellant’s attorney, Flanigan listed a number of facts undergirding his opinion as to the cause of the accident. Each factor he mentioned had been introduced, either as photographic or testimonial evidence. A thorough review of his testimony before the jury also fails to reveal any reliance on facts not in evidence. Thus we cannot agree that Flanigan’s pretrial reference to materials not introduced at trial was prejudicial.

The cases cited by the appellant do not compel a contrary conclusion. They merely teach that an expert must be in possession of sufficient proved facts to enable him to express a “reasonably accurate conclusion”, and that the facts upon which he bases his opinion must be disclosed to the jury. Gilbert v. Gulf Oil Corp., 4 Cir. 1949, 175 F.2d 705, 709; Atlantic Life Ins. Co. v. Vaughan, 6 Cir. 1934, 71 F.2d 394, 395-396, cert. denied, 293 U.S. 589, 55 S.Ct. 104, 79 L.Ed. 684. Thus, although the trial judge’s discretion to admit expert testimony is wide, it is not so expansive as to allow whim or conjecture to be received in the guise of expert analysis. See Gilbert v. Gulf Oil Corp., supra; Atlantic Life Ins. Co. v. Vaughan, supra; See also Craig v. Champlin Petroleum Co., 10 Cir. 1971, 435 F.2d 933, 937. Nowhere do these decisions endorse the proposition that every document viewed by the expert must be introduced. Here, the facts relied upon were in evidence, and appear to be largely uncontroverted. To have permitted an expert to offer his opinion on such a basis was neither an abuse of the district court’s discretion nor reversible error.

In challenging Flanigan’s testimony, the appellant also contends that his opinion was impermissibly based on the opinion of Corporal Collins. It has long been the rule in Georgia that an expert may not base his opinion upon an opinion expressed by another witness. Walker v. Fields, Ga.Sup.1859, 28 Ga. 237; Holland Furnace Co. v. Willis, Ga.App.1969, 120 Ga.App. 733, 172 S.E.2d 149, 152. And some Courts of Appeals have held that the trial court must take steps to exclude any expert opinion that is predicated upon another opinion. 6816.5 Acres of Land, etc. v. United States, 10 Cir. 1969, 411 F.2d 834, 840; Taylor v. B. Heller & Co., 6 Cir. 1966, 364 F.2d 608, 613. We need not wrestle with the wisdom of such a rule, however, since we do not believe that Flanigan’s opinion here was predicated upon the opinion testimony of another. First, it is clear that most of Collins’s report concerns facts — measurements, descriptions, and the like — rather than opinion. In this respect, Collins was not testifying as an expert, and opinion founded on his report or deposition would not be improper. Moreover, Flanigan appears to have used Collins’s deposition and report primarily as background material, rather than as the foundation of his opinion. Thus this case would appear to resemble Hensel Phelps Construction Co. v. United States, 10 Cir. 1969, 413 F.2d 701, 704, in which the Tenth Circuit held that where an expert did not predicate his opinion on another’s, but used the other opinion to corroborate his own findings, no exclusion was required.

In any event, if the admission of Flanigan’s testimony was erroneous, we do not believe that it was harmful. All of the facts on which Flanigan offered an opinion — the point of impact, the position of the vehicles before and after the collision, the nature of the intersection where the accident occurred —were already in evidence from other sources. Thus Flanigan’s testimony and opinions were essentially cumulative, reinforcing the testimony of the two investigating officers and the two eye witnesses. Under Fed.R.Civ.P. 61, the admission of such testimony, even if it was error, was harmless. See Leach v. Miller’s Life Insurance Co., 5 Cir. 1968, 400 F.2d 179, 182; Aetna Casualty & Surety Co. v. Tryniecki, 5 Cir. 1961, 293 F.2d 289, 291; American Motorists Insurance Co. v. Landes, 5 Cir. 1958, 252 F.2d 751, 753.

y

Finally, the appellant contends that the evidence adduced at trial was insufficient to support the verdict rendered by the jury. In support of this assertion, Mrs. Stancill recites the testimony of witnesses favorable to her theory of the case, and points out certain discrepancies between testimony given by Whitely at trial and several statements in his deposition. In considering such arguments, an appellate court may not usurp the functions of the jury. It is not for us to weigh conflicting evidence, judge the credibility of witnesses, and evaluate the jury’s verdict in that light. Torrence v. Union Barge Line Corp., 5 Cir. 1969, 408 F.2d 873, 875; United States v. Mills, 5 Cir. 1968, 399 F.2d 944, 948. Rather, “our sole function is to ascertain if there is a rational basis in the record for the jury’s verdict.” Helene Curtis Industries Inc. v. Pruitt, 5 Cir. 1967, 385 F.2d 841, 850, cert. denied, 1968, 391 U.S. 913, 88 S.Ct. 1806, 20 L.Ed.2d 652 [emphasis in original]. And, in the words of the Supreme Court, “only when there is a complete absence of probative facts to support the conclusion reached does a reversible error appear.” Lavender v. Kurn, 1946, 327 U.S. 645, 653, 66 S.Ct. 740, 744, 90 L.Ed. 916, 923.

There is ample evidence to support the jury’s verdict here. Both witnesses who observed the Carvers’ pick-up truck immediately prior to the accident testified that it failed to halt at the stop sign at the intersection of U.S. Highway 441 and Shiloh Road. There was expert testimony by Chief Deputy Webb that, in his opinion, the Carver truck had failed to yield the right of way, and both photographic and testimonial proof was offered which indicated that a substantial portion of the Carver vehicle was in the northbound (Whitely’s) lane at the time of impact. In light of this evidence, it was certainly not erroneous for the jury to conclude that the sole cause of the accident was the negligence of the driver of the pick-up and render a verdict in favor of the defendant.

For the reasons outlined above, the verdict appealed from is, in all respects,

Affirmed.

      . Rule 13 (a) provides:
      (a) Compulsory Counterclaims. A pleading shall state as a counterclaim any claim which at the time of serving the pleading the pleader has against any opposing party, if it arises out of the transaction or occurrence that is the subject matter of the opposing party’s claim and does not require for its adjudication the presence of third parties of whom the court cannot . acquire jurisdiction. But the pleader need not state the claim if (1) at the time the action was commenced the claim was the subject of another pending action, or (2) the opposing party brought suit upon his claim by attachment or other process by which the court did not acquire jurisdiction to render a personal judgment on that claim, and the pleader is not stating any counterclaim under this Rule 13.

      . The special interrogatories were answered as follows:

      . Rule 49(b) provides:
      (b) General Verdict Accompanied by Answer to Interrogatories. The court may submit to the jury, together with appropriate forms for a general verdict, written interrogatories upon one or more issues of fact the decision of which is necessary to a verdict. The court shall give such explanation or instruction as may be necessary to enable the jury both to make answers to the interrogatories and to render a general verdict, and the court shall direct the jury both to make written answers and to render a general verdict. When the general verdict and the answers are harmonious, the appropriate judgment upon the verdict and answers shall be entered pursuant to Rule 58. When the answers are consistent with each other but one or more is inconsistent with the general verdict, judgment may be entered pursuant to Rule 58 in accordance with the answers, notwithstanding the general verdict, or the court may return the jury for further consideration of its answers and verdict or may order a new trial. When the answers are inconsistent with each other and one or more is likewise inconsistent with the general verdict, judgment shall not be entered, but the court shall return the jury for further consideration of its answers and verdict or shall order a new trial.

      . Our examination of the trial transcript suggests another possible explanation for the jury’s failure to award damages to McKenzie. During the course of the trial, the plaintiff was permitted to elicit a considerable amount of testimony concerning large sums of cash allegedly carried on the persons of the plaintiff’s parents. None of this money, described as amounting to $75,000 or more, was ever recovered. The introduction of such evidence obviously had no relevance to this action for wrongful death, and, it would appear to us, was intended to induce sympathy for the plaintiff, who had apparently been deprived of a substantial portion of her inheritance. The fact that McKenzie received no award on its counterclaim may indicate that sympathy for the plaintiff was one result of this testimony.

      . Rule 43 (a) provides :
      (a) Form and Admissibility. In all trials the testimony of witnesses shall be taken orally in open court, unless otherwise provided by these rules. All evidence shall be admitted which is admissible under the statutes of the United States, or under the rules of evidence heretofore applied in the courts of the United States on the hearing of suits in equity, or under the rules of evidence applied in the courts of general jurisdiction of the state in which the United States court is held. In any case, the statute or rule which favors the reception of the evidence governs and the evidence shall be presented according to the most convenient method prescribed in any of the statutes or rules to which reference is herein made. The competency of a witness to testify shall be determined in like manner.

      . Rule 61 provides:
      No error in either the admission or the exclusion of evidence and no error or defect in any ruling or order or in anything done or omitted by the court or by any of the parties is ground for granting a new trial or for setting aside a verdict or for vacating, modifying or otherwise disturbing a judgment or order, unless refusal to take such action appears to the court inconsistent with substantial justice. The court at every stage of the proceeding must disregard any error or defect in the proceeding which does not affect the substantial rights of the parties.


author: JOHN R. BROWN, Chief Judge:

text:
    Norman M. MORRIS, Plaintiff-Appellant, v. FEDERATED MUTUAL INSURANCE COMPANY, Defendant-Appellee.
    No. 73-2669.
    United States Court of Appeals, Fifth Circuit.
    July 18, 1974.
    Rehearing Denied Aug. 27, 1974.

      Joe N. Unger, Miami Beach, Fla., Bennett G. Feldman, Miami, Fla., for plaintiff-appellant.
    Joseph F. Jennings, Miami, Fla., for defendant-appellee.
    Before BROWN, Chief Judge, and TUTTLE and SIMPSON, Circuit Judges.
   JOHN R. BROWN, Chief Judge:

Following amicable termination of his employment Morris, a former insurance solicitor employee of Insurer, Federated Mutual Insurance Company, a direct writing company, brought this suit seeking to recover over $12,000.00 in back salary, retirement funds and an amount due on a contract settlement. Insurer counterclaimed alleging that Morris owed the company for losses incurred under policies written without company authorization and chargebacks for commissions paid to Morris on cancelled policies or unpaid premiums. While the parties agreed in a pretrial stipulation that Morris was entitled to back pay and retirement funds worth over $6,000.00, Morris found this amount offset by the District Court’s final judgment in favor of Insurer. When the dust had cleared, Morris was not only left with empty pockets, he was indebted to his former employer to the tune of approximately $12,000.00. Concluding that the District Court improperly allowed recovery by Insurer for chargebacks and incurred losses and disallowed renewal contract payments, we reverse.

Morris had worked as a straight commission salesman for Insurer from April 1966, until December 1, 1970. He was a high producer with a gross of a half million in premiums and net commission in the neighborhood of $48,000.00. On December 1, 1970, he began working under a new sales agreement by which he would receive a fixed salary for $17,500.00 plus commissions on new business only. Morris thereafter voluntarily terminated his employment with Federated Mutual on January 31, 1971.

In June 1970 prior to converting over to a salaried employee on December 1, Morris at Insurer’s behest had contracted with it to transfer all of his existing accounts (commercial and P.I.D.) to a new agent in return for $7,532.00 to be paid over a five year period. This transfer agreement occurred prior to and is separate from his December new employment contract.

Chargebacks

When Morris assumed his new employment status as a salaried agent he was to receive no further commissions for policies written by him before December 1, 1970. Insurer in its counterclaim contended that while Morris would receive no commissions for his old business Insurer had the right under the new employment contract to deduct from Morris’ salary (not just commissions on new business) the appropriate portion of all premiums credited to him prior to December 1, 1970 but which from nonpayment by policy holders, cancellations, etc., were not retained by Insurer. These adjustments are called charge-backs and were standard procedure under Morris’ former commission employment contract. Morris disclaims any chargeback liability after December 1, 1970, asserting that under his new employment contract he was to receive neither commissions nor chargebacks from policies written before December 1, 1970.

The District Court found that appellant owed the appellee over $4,000.00 in chargebacks for returned or unearned premiums arising from business written before December 1 (see Item (i), note 2, supra.). While making no mention of the new employment contract, the District Court, presumably crediting Insurer’s evidence as to the intention of the parties, held that the new December 1970 contract did not alter the former requirement of an adjustment.

As with the June 1970 renewal transfer agreement, the conversion by Morris from a commission to a salary contract was not his idea or necessarily to any advantage to him. On the contrary it was initiated by the company in November of 1970 as a part of its high-level management plan to disengage from the sale of unprofitable casualty lines of insurance in the Miami area. Morris’ conversion contract was embodied in a “New Sales Agreement” which in letter form merely stated that “[y] our annual salary will be $17,500.00, plus new business commissions . . .” Although this was a written contract, evidence was introduced by both parties undertaking to recite the substance of words spoken in the formulation of the new agreement in an effort to demonstrate what the respective positions of the parties were when the agreement was signed. On this Morris argued that as an integral part of the agreement it was intended that he would not be held liable for chargebacks on old business when he was relinquishing any right to future commissions from his old business. Insurer countered with the contention that it was intended that Morris continue to be bound by the former employment contract and the salary merely paid him for servicing the existing policies (and any renewals) of the discontinued lines of insurance. Thus the new agreement was merely a written modification of the existing contract.

The cardinal rule under Florida law for construction of a contract is to ascertain and give effect to the mutual intentions of the parties. Shuford Development Co. v. Crysler Corp., 5 Cir., 1971, 449 F.2d 429, 432; Southern Bell Tel. & Tel. Co. v. Florida East Coast Ry., 5 Cir., 1968, 399 F.2d 854, 856. In doing so the Court must attempt to place itself in the respective positions of the parties to determine their intent when the contract was signed. The process includes consideration of all surrounding circumstances including the language of the agreement and actions of the parties during negotiation.

In interpreting Morris’ employment contract, which contains no expressed terms regarding chargebacks, we consider the agreement as a whole in the setting of the parties but without regard to what each side’s witnesses described the intention to have been. At the outset, the agreement is entitled “New Sales Agreement” with no reference to being a modification of an existing employment contract. The agreement provides that Morris “will be placed under a salary and new business commission basis for the sales in Bro-ward and Dade Counties in Florida.” No mention is made that Morris will lose commissions from old lines of business. To the contrary, the structure is to distinguish sharply between old business and new business. For old business the commission system is out altogether. For servicing old business including renewals of it, the sole compensation is a salary. The only business subject to commission is new business written after December 1970.

Additionally, there is even less basis for concluding, as Insurer insists, that while denominated a “new” employment contract it was really meant to be a sort of adjunct to the former employment contract. This contract in its main part (para. 3) prescribed that the employee will be compensated in accordance with the “Premium Plan of Compensation” which was attached. Except for a single rare case, the method of compensation prescribed is that of commissions on new and renewal business.

Out of a system of commissions as the source and measure of compensation comes the appropriateness of debits when premiums are lost or reduced. When a fixed salary, not variable commissions, is the source the reason for chargebacks is gone and unless expressly required they are not to be implied.

The chargebacks were improper.

Transfer Agreement

In June 1970, again at the instigation of Insurer, Morris was required to and did transfer over to a new district manager, Johnson, a number of his accounts. This was a practice of Insurer as a way of assisting a new salesman in working up accounts of his own. In this case it was also motivated by the fact that Insurer felt that Morris with half a million in gross premiums had too much business to handle.

To reimburse Morris for his lost base earnings in the transfer of his commercial accounts to the new agent, Insurer agreed to pay Morris $7,352.00 in monthly payments extending over a five year period. The letter agreement made no reference to any contingencies on the payments such as continued employment with the company. However, when Morris left the company in January of 1971, the payments were terminated even though nearly $6,000.00 of the amount remained unpaid. Insurer argued that the payment was calculated on the value of the commissions for contracts transferred to the new agent. When he terminated his employment with the company, all compensation ended — payments for transfer as well as salary.

The same rules of contract interpretation will apply to this agreement of transferring Morris’ accounts. Shuford Development Co. v. Crysler Corp., supra; Southern Bell Tel. & Tel. Co. v. Florida East Coast Ry., supra. A reading of the contract indicates that the intent of the parties was to compensate Morris for the loss of base earnings from the commercial accounts being transferred to the new agent.

In the very way it was structured, the formula is itself an estimate of what Morris would have received over a five year period had he retained the accounts as his own. That this was dealing with events which were necessarily unknown —or even ascertainable except on the basis of some informed estimate of the future — is reflected by the fact that the amount per dollar payable annually for 5 years ran from a high of 80^ for the first year to a low of 30‡ for the fifth (last) year. (See note 6, supra.)

Morris had a valuable property interest in the potential renewals of accounts which he was required to surrender. The unqualified promise to pay a fixed sum which was demonstrated both by the total and the annual amounts plus the formula for calculating them cannot be extinguished by the mere fact of termination of employment.

Incurred Losses

The final issue on appeal concerns Morris’ liability to Insurer for an out-of-court settlement of a claim made by Insurer on unauthorized fire insurance coverage handled by Morris. The District Court ordered that Morris reimburse the company for the $10,000.00 settlement as well as nearly $2,400.00 in attorney’s fees. (See Item (ii), note 2, supra.)

In July 1969, Morris gave a binder for fire insurance coverage in the amount of $40,000, in violation of company rules, to Assured, the owners of Lindy’s Restaurant. Morris was introduced to Assured by Tom Fryer, an insurance agent whom Assured referred to as their “insurance man.” Fryer had come to Morris because Fryer did not have fire coverage available directly. A check for $88.00 drawn by Assured payable to Insurer was given to Morris as payment for 20% of the annual policy premiums. When Morris was advised that Insurer would not issue a policy, Morris returned the $88.00 check to Tom Fryer. Fryer endorsed the check made payable to Insurer and deposited it in his personal account.

The fire occurred in April 1970— eight months after the first and only payment had been made. The owners estimated damages at $65,000.00 and filed a suit against Insurer for reimbursement. Insurer settled out of court for $10,000.00 and argues that the settlement was a wise business judgment since Morris had bound the company under the theory of apparent authority.

With Morris acknowledging breach of two instructions (note 7, supra), Insurer naturally stressed the well settled Florida principle that:

“[A]n agent owes to his principal the obligation of high fidelity, and that he may not proceed without or beyond his authority, particularly where he has been forbidden to act and that so proceeding, his actions caused loss to his principal, the agent is fully accountable to the principal therefor.”

Crawford v. DiMicco, 216 So.2d 769, 772 (Fla. 4th Dist. 1968). Insurer claims that it suffered a loss since Morris, despite these breaches, proceeded to represent to Assureds that they had coverage. These actions on the part of Morris, although in violation of internal limitations, were done under the apparent authority of Insurer so that it had a potential liability under the coverage as initially afforded.

The trouble with Insurer’s position is that it acted without either (i) a judicial determination that by reason of Morris’ conduct it was legally liable or (ii) adequate notice by vouching in or otherwise to Morris of its intention to hold him liable for any losses in the defense of the Assureds’ suit on the vicarious policy.

We do not mean to hold either generally or in an Erie-way for Florida that faced with the peril of major loss a principal has to suffer that risk to secure indemnification. The principal suffers loss when the agent’s default has exposed it to such risks. Settlements if prudently made and with adequate notice can fix the indemnitor’s liability with little more thereafter than establishing the fact of the agent’s wrong — a factor here undisputed.

With today’s penchant for utilizing rules which were intended to simplify litigation as a means of making it more complicated, the usual tactic is an impleader. See, Rule 14, F.R.Civ.P. Sometimes that tactic is poor strategy.

But that does not leave the party helpless. For the law has, almost from the beginning of time, afforded a convenient, easy, non-obnoxious device to shift the burden of defense on the express or implied indemnitor or saddle him with the consequences of the outcome. It is the simple vouching in — a latter day shorthand for the voucher to warranty of ancient days — which requires nothing more than a letter with perhaps the precaution of registered or certified mail.

Florida recognizes this, as Judge Barns demonstrates in his fascinating opinion in Olin’s Rent-A-Car System, Inc. v. Royal Continental Hotels, Inc., D.Ct.App., 1966, 187 So.2d 349, 351, et seq.

Here there was no impleader (see note 11, supra.) nor even any notice to Morris by voucher or otherwise either of the suit or a purpose to look to him for reimbursement.

The absence of any such Voucher/Notice puts a heavy burden of evidentiary proof on one asserting the (i) existence of serious exposure to substantial liability and (ii) the reasonableness of a settlement.

This is reflected by the meager record made by Insurer here. The only word testimony of reasonableness came from the claims manager who relayed as hearsay the fact that counsel had recommended the settlement. There was no indication of what kind of an investigation had been made, or what it reflected. On the status of Fryer vis-a-vis Assureds or their understanding of his actions in receiving, endorsing, and negotiating their check, payable to Insurer, either by way of investigative statements, or by pretrial discovery deposition in the insurance suit, not a word appears.

Since Morris was neither aware of the proposed or consummated settlement, nor notified by voucher or otherwise that Insurer would look to him for reimbursement, we hold that the record was not sufficient on which to base the requisite finding of a prudent settlement. So Insurer fails on this too.

Reversed.

      . The pretrial stipulation, the parties agreed that Insurer owed Morris the following:
      Item
      (a) Salary $1,458.00
      (b) February New Business 394.00
      (c) Retirement Fund Refund 5,139.94
      $6,991.94
      Less:
      (d) January New Business -519.00
      NET DUE $6,472.94
      In addition, as a disputed item Morris claimed $7,352.00 on the Johnson renewal transfer (see note 6, infra.).

      . Offset items allowed and in dispute on this appeal are:
      Item:
      (i) Chargebacks
      (a) Nuway Auto $ 652.00
      (b) John Mathews Ford 3,426.00
      $ 4,078.00
      (ii) Incurred Losses
      (a) Lindy’s Restaurant 12,382.04 12,382.04
      TOTAL $16,460.04

      . Morris’ employment contract was called a “Salesman Employment Contract” with compensation being commissions on the sale of insurance and renewal of those policies.

      . Limited to certain policy holders it provided : “It is agreed that on certain policy holder accounts the base earnings or new premium rates of commission or both may vary from the above schedule of commissions.”

      . The manual, Sec. 3, Sub. 1, reflects that district managers (as was Morris) might receive a subsidy to be fixed by Insurer.

      . The letter agreement provided:
      It has been agreed that we are to reimburse you for loss of commercial lines base earnings only.
      Attached to your copy of the list of commercial accounts being transferred from you to Don is a tape which has been run on the adjusted base. It totals $2,774.72, or for reimbursement purposes, $2,775. We propose to pay you in the following manner beginning on May 1, 1970, which is the effective date of the transfer:
      first year $2220 or $185 per month (800 for each of $2775)
      second year $1803 or $150 per month (650 for each of $2775)
      third year $1387 or $116 per month (500 for each of $2775)
      fourth year $1110 or $ 93 per month (400 for each of $2775)
      fifth year $832 or $ 69 per month (300 for each of $2775)
      $7,532.00

      . Insurer liad two rules regarding issuance of fire insurance policies. For restaurants, before a policy could be issued, the restaurant had to be inspected. Where a binder was given a written application that the insurance company was bound had to bo submitted to the company on the same day as the coverage was to go into effect. Morris failed to comply with either rule.

      . Morris stated that he attempted to return the check directly to Assured but could not contact them. Therefore, he gave the check to Tom Fryer who agreed to return the check to the owners.

      . Assured was apparently indebted to Fryer on their other insurance matters handled by him. Through bank statements Assured was aware that Fryer, not Insured, had negotiated the premium check.

      . Mr. Robert Berryhill, a claims manager with Insurer, reviewed the investigation of the Lindy claim and concluded that there was no contractual coverage but felt as a practical matter a settlement was preferable. The settlement amount of $10,000.00 was recommended by Insurer’s counsel and agreed upon by company officials.

      . Insurer’s claims manager implied as much here since to have formally impleaded Morris might give the appearance of more merit to the claim than warranted.

      . See 17 Fla.Jur. § 7.

      . He traces it back to twelfth century Teutonic law.

      . Morris’ deposition was apparently taken in the Assured’s suit, but by whom or what he said is a complete mystery.

      . Cat’N Fiddle, Inc. v. Century Insurance Co., Fla., 1968, 213 So.2d 701, reflects the strong holding that, standing alone, the actions of Morris in notifying Fryer would have been ineffective in cancelling the policy. But it recognizes that it is a question of agency and knowledge, if any, on the part of the Assured as to what the broker-agent has done.