Respondent induced petitioner and others to join with him as
subscribers to a syndicate agreement, under which the stock of a
corporation was acquired, other property purchased and added to its
capital, its stock increased, and the shares distributed to the
subscribers in proportion to their subscriptions. By this
agreement, respondent was constituted an agent for the other
subscribers, with large powers, and became their fiduciary in
respect of the acquisition
Page 242 U. S. 132
and management of the subject matter. By misleading
representations and suppression, he concealed the fact that the
original shares were largely his when the agreement was made, and,
carrying out a purpose entertained from the beginning,
surreptitiously made use of those he owned in squaring off his
subscription. Subsequently, petitioner and other subscribers,
discovering this deception and fraud, promptly elected to rescind,
gave due notice, offered to return all stock by them received, and
demanded back their money.
that tender of the stock actually received, being
all the subscribers could do toward restoring the original
position, was an adequate preliminary to an action at law against
the respondent to recover the amounts paid on their subscriptions.
Heckscher v. Edenborn,
203 N.Y. 210, approved.
Although, on a question of commercial law or general
jurisprudence, the federal courts exercise their own judgment, they
nevertheless lean toward agreement with the state courts where the
question is balanced with doubt.
206 F. 275 reversed.
The case is stated in the opinion.
MR. JUSTICE McREYNOLDS delivered the opinion of the Court.
By an action at law commenced in the Supreme Court, Kings
County, New York, and subsequently removed to the United States
circuit court because of diverse citizenship, petitioner, Sim,
sought to recover from respondent the amounts paid upon
subscriptions to a syndicate agreement which the latter
fraudulently induced him and his assignors to make. By stipulation,
a jury being waived, the issues were referred to a referee. The
reported facts, essential to an understanding of points now
involved, are summarized below.
Page 242 U. S. 133
While owning the majority stock of United States Iron Company,
respondent and others conceived a scheme to consolidate it with
certain coal properties, erect blast furnaces, engage in smelting
and manufacturing iron, etc. He accordingly prepared an agreement,
dated April 15, 1902, stating generally the ends in view, and
invited subscriptions. This instrument designated him and two
others as "syndicate managers," and recited there was an
opportunity to acquire for cash the $1,000,000 capital stock of
that company, together with valuable coal properties, and that the
purpose was to raise the essential two and a half million dollars.
It further specified that
"the syndicate managers hereunder shall have the direction and
management of the subject matter of the said syndicate, and each
subscriber nominates and appoints the syndicate managers his agents
and attorneys irrevocable, until the termination of this agreement,
to exercise all the rights of the subscribers in and to the
properties proposed to be acquired."
Still other provisions conferred upon the managers wide
discretion and powers of control. Petitioner and his assignors
became subscribers while in entire ignorance of respondent's true
position. He represented that it was proposed to purchase only
valuable and paying properties; that subscriptions were payable in
dollars, and not in property; that he had made a subscription for
$500,000, payable in dollars; that the enterprise was being
organized in good faith; that all, according to their interest, had
equal rights and stood on same basis; that every man's dollar was
put up against every other man's dollar, and that there were to be
no special advantages to anyone. In fact, however, he always
intended to utilize stock owned by him in payment of his
subscription. The managers changed the company's name to Sheffield
Coal & Iron Company, increased the capital to $2,500,000, and
caused it to acquire additional coal properties. For cash paid to
Page 242 U. S. 134
by syndicate members, they delivered an equal amount of stock
issued by the corporation. In settlement of his subscription
(reduced from $500,000 to $475,000), respondent surrendered the
majority stock in United States Iron Company at a valuation of $70
per share, paid balance in cash, and took new certificates. When he
solicited and obtained subscriptions and received payments, he knew
subscribers were relying upon him faithfully to act as their agent.
Subsequent to the specified transactions, petitioner and his
assignors discovered respondent's interest, and thereupon promptly
elected to rescind their subscriptions, gave due notice to the
managers, offered to return and restore all stock received, and
demanded their money.
Relying on Heckscher v. Edenborn,
203 N.Y. 210, the
referee reported that Edenborn was liable for amounts paid, with
interest, and final judgment therefor was duly entered. The circuit
court of appeals declined to follow the state court, and, being of
opinion that "it is a condition of rescission that the status
shall be restored," and that no such restoration had been
offered, reversed the trial court (206 F. 275, 277). The cause is
here upon writ of certiorari.
Heckscher v. Edenborn
arose out of another subscription
to the agreement now involved, and the essential facts there and
here are substantially alike. After much consideration, the court
of appeals decided in favor of plaintiff, Heckscher, holding the
agreement was vitiated by fraud because Edenborn failed to reveal
his interest in the stock intended to be purchased, and, further,
that tender of stock actually received was all the subscriber could
do towards restoring the original position, and constituted an
adequate preliminary to an action for recovery. The opinion
expresses that court's deliberate conclusion upon the issues, and
is supported by reference to earlier decisions of its own and other
Page 242 U. S. 135
Petitioner now contends that the court of appeals was correct
upon principle, and, moreover, that, if doubts exist, they should
be resolved in favor of its opinion. On the other hand, respondent
maintains the questions involved are of general law, and that the
state court reached an unwarranted result, not to be accepted
This Court has many times considered how far federal tribunals,
when undertaking to enforce laws of the states, should follow
opinions of their courts. The authorities were reviewed and rule
announced in Burgess v. Seligman, 107 U. S.
, 107 U. S. 33
which declared that, as to doctrines of commercial law and general
jurisprudence, the former exercise their own judgment,
"but even in such cases, for the sake of harmony and to avoid
confusion, the federal courts will lean towards an agreement of
views with the state courts, if the question seems to them balanced
This has been often reaffirmed. Wilson v. Standefer,
184 U. S. 399
184 U. S. 412
Bienville Water Supply Co. v. Mobile, 186 U.
, 186 U. S. 220
Stanly County v. Coler, 190 U. S. 437
190 U. S.
-445; Great Southern Fire Proof Hotel Co. v.
Jones, 193 U. S. 532
193 U. S. 547
Tampa Waterworks Co. v. Tampa, 199 U.
, 199 U. S.
-244; Kuhn v. Fairmont Coal Co.,
215 U. S. 349
215 U. S.
-361; Ennis Waterworks v. Ennis,
233 U. S. 652
233 U. S.
-658; Moore-Mansfield Constr. Co. v. Electrical
Installation Co., 234 U. S. 619
234 U. S. 625
Lankford v. Platte Iron Works Co., 235 U.
, 235 U. S.
The conclusions of the court of appeals in Heckscher's
case are not in direct conflict with any declared views of this
Court, and some expressions in our former opinions tend to support
them. Veazie v.
8 How. 134, 49 U. S. 158
6 Wall. 254, 73 U. S. 258
Neblett v. Macfarland, 92 U. S. 101
92 U. S.
Through misleading representations and suppression of facts,
respondent induced syndicate subscribers to become parties to an
agreement creating him their agent to acquire and deal with certain
properties -- a position
Page 242 U. S. 136
of especial trust and confidence. His original undisclosed
purpose was to obtain their money and appropriate it toward
purchase of something partly owned by himself. Having led them to
entrust their funds to his discretion, he carried out his
preconceived plan, and, as a part of it, caused them to receive an
equivalent amount of corporate stock. He now seeks to avoid a
judgment, because his own actions have rendered it impossible for
him to get back to the beginning point.
This was not a proceeding in equity addressed to the court's
discretion, but a demand at law upon an agent for return of
something improperly received and disposed of. The defrauded
principals tendered back everything received by them -- did all
they could towards restoring original conditions. In such
circumstances, it is but just and right that any loss should fall
on the unfaithful agent, not on his too-confiding principals.
See Snow v. Alley,
144 Mass. 546, 551; O'Shea v.
201 Mass. 412; Bigelow on Fraud 430, 431; Wharton on
Contracts, § 285.
We think, in Heckscher v. Edenborn,
the court of
appeals reached a result well supported both by reason and upon
authority, and that the courts below should have followed it when
undertaking to determine rights depending upon the laws of New
York. The action of the circuit court of appeals is accordingly
reversed, and the judgment of the trial court is affirmed.
MR. JUSTICE McKENNA, MR. JUSTICE DAY, and MR. JUSTICE VAN
DEVANTER dissent, being of opinion that the questions involved are
of general, not local, law; that there has not been such
restoration of the status quo
as is essential to a
recovery at law upon a rescission, and that, upon the facts
specially found by the referee, the decision of the circuit court
of appeals was right.