Appendix — Post v. United States

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APPENDIX

UNITED STATES COURT OF APPRAIA

FOR THE DISTRICT OF COLUMBIA CIRCUIT

———

No. 20,861

Troy V. Post, Jz., Appellant

v.

Untrep Srares or America, Appellee

No. 20,862

Buu M. Auten, Appellant

v.

Untrep Srares or America, Appellee

No. 20,863

Leroy W. Picker, Appellant

A

Unrrep States or America, Appellee

Appeals from the United States District Court

for the District of Columbia

Decided October 15, 1968

Mr. Raymond W. Bergan, with whom Mr. Thomas R.

Dyson, Jr., was on the brief, for appellants.

Mr. Roger A, Pauley, Attorney, Department of J ustice,

of the bar of the Court of Appeals of New York, pro hac

vice, by special leave of court, with whom Messrs. David

G. Bress, United States Attorney, and Frank Q. Nebeker,

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Assistant United States Attorney, were on the brief, for

appellee. Mr. Scott R. Schoenfeld, Assistant United States

Attorney, also entered an appearance for appellee.

Before Fany, Senior Circuit Judge, and Wsicut and

Rosrinson, Circuit Judges.

Rosinson, Circuit Judge: Appellants were convicted by

a jury of conspiracy’ and maii fraud? stemming from their

activities in the promotion of Lakewood Country Club, in

the area of Rockville, Maryland, and the concomitant sale

of memberships therein. On these appeals, they allege error

in three rulings by which evidence was excluded as irrele-

vant to their efforts to show their good faith in transactions

impugned by the indictment. They also attack an instruc-

tion which defined for the jury appellants’ criminal liabili-

ties as promoters of the club. Two additional contentions

1°‘Tf two or more persons conspire either to commit any offense

against the United States, or to defraud the United States, or

agency thereof in any manner or for any porpose, and one or more

of such persons do any act to effect the object of the conspiracy,

each shall be fined not more than $10,000 or imprisoned not more

than five years, or both.’’ 18 U.S.C. § 371.

2‘*Whoever, having devised or intending to devise any scheme

or artifice to defraud, or for obtaining money or property by

means of false or fraudulent pretenses, representations, or promises,

or to seil, dispose of, loan, exchange, alter, give away, distribute,

supply, or furnish or procure for unlawful use any counterfeit

or spurious coin, obligation, security, or other article, or anything

represented to be or intimated or held out to be such counterfeit

or spurious article for the purpose of executing such scheme or

artifice or attempting so to do, places in any vost office or author-

ized depository for mail matter, any matter or thing whatever to

be sent or delivered by the Post Office Department, or takes or

receives therefrom, any such matter or thing, or knowingly causes

to be delivered by mail according to the direction thereon, or at

the place at which it is directed to be delivered by the person to

whom it is addressed, any such matter or thing, shall be fined not

more than $1,000 or imprisoned not more than five years, or both.’’

18 U.S.C. § 1341.

3a

which they advance are effectively foreclosed by decisions

rendered subsequent to their trial.*

In the summer of 1958, appellants conceived the blue-

print for a new country club to be developed in the vicinity

of Washington.‘ Locating a suitable site in 1959, they

organized four corporations through which the club was to

be established and operated,® and embarked upon the pro-

motional phase from which emanated the events giving

rise to the indictment. An advisory board, generally non-

functional, of well know citizens was organized, a sales

8’ The argument that the trial judge erred in giving the ‘‘ Allen

charge,’’ Allen v. United States, 164 U.S. 492 (1892), is frustrated

by Fulwood v. United States, 125 U.S. App. D.C. 183, 369 F. 2d

960 (1966), cert. denied 387 U.S. 934 (1967). The claim that the

indictment should have been quashed because of delay incidental

to its procurement is nullified by Tynan v. United States, 126 U.S.

App. D.C. 206, 207-09, 376 F. 2d 761, 762-64, cert. denied 389 U.S.

845 (1967), which requires prejudice—a condition the record here

negates—resulting from the delay. There is no occasion for us

to reconsider these decisions. See District of Columbia v. Grimes,

No. 21,555 (D.C. Cir. March 26, 1968) at 9-10 (concurring opinion)

and cases cited.

*Their plan, they say, was to create a golf and country club

complex which they would own and manage, and from which they

would reap all profits. Lacking experience in such matters, they

proposed to engage the necessary professional personnel to make

the project work.

5 One, Lakewood Country Club, Inc., was a nonstock nonprofit

corporation, no part of the net earnings of which could inure to

the benefit of any director or member. Its directorate consisted

of three of appellants’ friends, and it was to be the sublessee of the

club premises. The others, all business corporations of which ap-

pellants were the sole stockholders and directors, were P.A.P., Inc.,

which was to be the lessee, and in turn the sublessor to Lakewood

Country Club, Inc., of the club property; Lakewood Management

Corporation, which was to operate the club; and Country Club

Developers, Inc., which, as prime contractor under agreement with

Lakewood Management Corporation, was to build the club’s

facilities.

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office was opened and a sales staff hired, and a thorough-

going campaign for members was launched. There was

extensive newspaper advertising, and tens of thousands

of direct mail advertisements were sent to area residents.

The promotional literature was issued under the apparent

auspices of the advisory board, and appellants’ names

were omitted.

Opportunities for affiliation with the incipient club as-

| sumed the form of $1,000 life memberships and $300 regular

memberships, and the distinctive characteristics of each

were publicly proclaimed. Life members would be im-

munized from all dues, assessments and minimum spending

requirements, but regular members would be required to

pay monthly dues. Life memberships would also be in

‘*limited number ;’’ applicants therefor were told that their

ratio to others would be about one in ten, and the maximum

number was variously fixed between 100 and 300. By

October 1, 1960, however, 1,124 life memberships had been

sold, as compared with only 719 regular memberships, and

the club’s bylaws, when distributed, authorized the directors

—appellanis’ appointees—to impose a minimum spending

requirement upon all members irrespective of class.®

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Appellants’ promotional crusade met instant and spec-

tacular success, garnering membership fees aggregating

: more than $1,250,000.7. While membership solicitations

j continued unabatedly, construction of the club’s facilities

got under way, and proved to be a lucrative enterprise

Le Acting through their wholly-owned cor-

; porations,® they turned handsome profits on a land lease

* This requirement, however, was never invoked while appellants

operated the club.

TIn addition to this amount, more than $250,000 was also col-

lected from members for excise taxes.

—

® See note 5, supra.

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to the club® and on contracts for the construction of its

facilities."° They were also paid more than $200,000 during

a 20-month period in salaries, commissions and fees pur-

suant to a variety of intracorporate arrangements. In

addition, they advanced from the monies collected for

initiation fees large sums to other country clubs in which

they were financially interested.'' The evidence warranted

the conclusion that Lakewood’s membership, actual and

potential, remained unaware of appellants’ proprietary

stake in the country club complex and the extent ‘o which

they were profiting from it.

By the fail of 1960, the club’s funds were exhausted, and

construction on its clubhouse came to a halt.*2 A member-

ship meeting in December culminated in the election of a

new board of directors, which during the next several

months endeavored unsuccessfully to negotiate an accord

with appellants. Finally, in March, 1961, suit was filed in

*The Club site was leased tc P.A.P., Inc., for 50 years at an

annual rental of $15,000, and wita the lease was coupled an option

to purchase. P.A.P., Inc., subleased to Lakewood Country Club,

Inc., at a rental of $60,000 annually for three years only—meaning,

necessarily, renegotiation at the end of that term.

Country Club Developers, Inc., contracted with Lakewood

Country Club, Inc., for the construction of facilities, and then

subcontracted with others for the actual work at much lower costs.

Among the facilities as to which there were substantial price differ-

entials were the clubhouse ($625,000 and $543,000), the golf

course ($245,000 and $165,000) and the tennis courts ($43,500

and $16,000).

14 Qne such transaction was a $63,000 transfer to Golf Con-

tractors, Inc., a Texas company owned by appellants, which is dis-

cussed in Part III, infra.

18 Other facilities, including the golf course and swimming pools,

were completed and in use. Testimony for the Government made

the point that all facilities could ‘‘easily’’ have been constructed

from the monies collected during the first few months of the mem-

bership campaign.

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the District Court for the District of Columbia seeking a

conservatorship, the ouster of appellants, and the recapture

of monies claimed to have been wrongfully diverted.* On

March 31, 1961, a conservator was appointed for all of the

corporations involved in the affair, and appellants were

prohibited from further operation of the club. There-

after, in February, 1962, the litigation was settled by a

consent order."

The indictment leading to appellants’ convictions charged,

in substance, material misrepresentatior associated with

the sale of memoperships, including the use of the names of

the advisory committee members, the statements as to

the ‘‘limited number’’ of life memberships and their non-

assessable character, and the nondisclosure of appellants’

interests in and their profiteering from the club. At the

trial, the core question was whether Lakewood Country

Club was, as the Government contended, a scheme to de-

fraud prospective members or was, as appellants insisted,

a ligitimate business venture that unexpectedly and un-

fortunately failed. Appellants concede that the record

coutains evidence which amply supports the jury’s ver-

dicts." They urge, however, that by virtue of the three

exclusionary rulings, the jury was precluded from hearing

evidence critical to their defense, and that, in consequence

of the instruction under assault, was inadequately in-

18 Lakewood Country Club, Inc. v. Post, Civil No. 805-61 (D.D.C.

filed March 15, 1961). See also Lee v. Post, Civil No. 1157-61

(D.D.C. filed April 17, 1961), which was instituted by the con-

servator after his appointment.

1¢ Discussed in Part IV, infra.

16 The indictment charged each appellant in one count of con-

spiracy, see note 1, supra, and 19 substantive counts of maii fraud,

see note 2, supra. Three counts were withdrawn or dismissed at

the close of the Government’s case in chief. The jury convicted

each appellant on the conspiracy count and 13 of the substantive

cuunts, and acquitted on each of the remaining fore.

7a

formed as to the Government’s burden of proof and the

criminal intent prerequisite to conviction. With these con-

tentions we do not agree, and we accordingly affirm the

convictions.

I

We approach our review, against the factual backdrop :

summarized, of the three exclusionary rulings advertent 4%

to familiar admonitions validated by generations of judicial

experience. ‘‘It is for ordinary minds,’’ we are instructed,

‘‘not for psychoanalysts, that our rules of evidence are

framed. They have their source very often in considera-

tions of administrative convenience, of practical policy, and ;

not in rules of logic.’’** Not the least of the evidentiary

principles so shaped are those by which the relevance of

proffered eviderze is to be measured. ;

An inevitable concomitant of the Anglo-Americar. legal

system, with its sharp distinction in function between judge

and jury, is ‘‘the rough and practical quality . . . notice-

able in the whcle law of probative value.’’’* This is

because ‘‘the Court will of course allow to be considered

only such evidence as is worth submitting to men who will

judge only by the most common and practicable tests.’’ 1°

As an even more significant consequence, ‘‘the effect is

to require a generally higher degree of probative value

for all evidence to be submitted to a jury than would be

asked in ordinary reasoning.’’’® For ‘‘({t]he Judge, in

his efforts to prevent the jury from being satisfied by

matters of slight value, capable of being axaggerated by

prejudice and hasty reasoning, has constantly seen fit to

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16 Shepard v. United States, 290 U.S. 96, 104 (1933).

171 J. Wigmore, Evidence § 28 at 409 (3d ed. 1840).

18 Thid. :

19 Ibid (emphasis omitted).

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exclude matter which does not rise to a clearly sufficient

degree of value.’’ *

These factors, in turn, define broadly the dissimilar roles

trial and appellate judges play in scrutinizing evidence the

pertinence of which is in issue. ‘‘It is the duty of the

trial judge,’’ we have declared, ‘‘to determine relevancy

in terms of the worth of the proffer. ‘Each single piece

of evidence must have a plus value,’ something more then

& minimum in a probative sense.’’** Just how much more

is a determination which by its very nature, of course,

exacts a careful and often difficult estimate in the context

of all else that the trial involves. The very considerations

that condition a criminal conviction upon incriminating

proof beyond a reasonable doubt entitle the accused to

ample latitude in evidentiary presentations from which

such a doubt might fairly arise. On the other hand, the

possibilities of confusion and false deduction from circum-

stances of nebulous significance are real dangers that can-

not be casually ignored. Trial judges, occupying an excel-

lent vantage point, must be afforded leeway in striking

the balance,”? a most delicate task when, as in the case at

bar, the operations of the human mind are to be probed.”

Appellate judges, on the other hand, must accord to trial

rulings on relevance a respect commensurate with the occa-

* Td. at 409-10.

21 Frank R. Jelleff, Inc. v. Braden, 98 U.S. App. D.C. 180, 188,

233 F. 2d 671, 679 (1956), quoting 1 J. Wigmore, Evidence § 28

at 410 (3d ed. 1940).

2 See Vareltzis v. Luckenbach S.S. Co., 258 F. 2d 78, 81 (2d Cir:

1958); Miller v. Alexandria Truck Lines, 273 F. 2d 897, 900-0%

(5th Cir. 1960) ; Metropolitan Life Ins. Co. v. Armstrong, 85 F. 2d

187, 193 (8th Cir. 1936).

78 See Glasser v. United States, 315 U.S. 60, 81 (1942).

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sion.* ‘‘There is no bright line that divides evidence

worthy of consideration by a jury, although subject to

heavy counterattack, from evidence that is not,’’* and

we are not unmindful of ‘‘the inescapable remoteness of

appellate review.’’** With these twin handicaps, we per-

form our reviewing function both carefully and deferentially

lest ‘‘the perspective of the living trial is lost in the search

for error in a dead record.’’** When the issue is close,

relevance is primarily for the trial judge to gauge,“ and

we will not lightly overrule his considered judgment.”

* The complexities of appellants’ operations are portrayed

vividly in the enormous record built in the District Court. The

trial consumed 34 days over an eight-week period. Numerous

witnesses testified on the ramified factual issues, and each side

introduced scores of exhibits. The jury deliberated for 20 hours

over four days, returning once to have the entire charge repeated,

and again to report its then inability to agree. See note 3, supra.

* Herman Schwabe, Inc. v. United Shoe Mach. Corp., 297 F. 2d

906, 912 (2d Cir.), cert. denied 369 U.S. 865 (1962).

% Luck v. United States, 121 US. App. D.C. 151, 157, 348 F. 2d

763, 769 (1965).

™ Glasser v. United States, supra note 23, 315 U.S. at 88 (dis-

senting opinion).

*8 *‘Even in judicial trials, the whole tendency is to leave rulings

as to the illuminating relevance of testimony largely to the dis-

cretion of the trial court that hears the evidence. [Citations

omitted] Courts of appeal are less and lecs inclined to base error

on such ralings.”” NLRB v. Donnelly Garment Co., 330 U.S. 219,

236 (1947).

°“*Tn the absence of a showing of a clear abuse of discretion, we

will not say that he erred ....’’ Frank R. Jelleff, Inc. v. Braden,

supra note 21, 98 U.S. App. D.C. at 189, 233 F. 2d at 680. See

also Hannan v. United States, 76 U.S. App. D.C. 118, 120, 131 F.

2d 441, 443 (1942) ; Maryland Cas. Co. v. Citizens State Bank, 84

F. 2d 172, 174 (5th Cir. 1936) ; Brigham Young Univ. v. Lillywhite,

118 F. 24 836, 841, 187 A.L.R. 598 (10th Cir. 1941). And see the

cases Cited supra notes 22 and 27.

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In opposition to the Government’s charge of conspira-

torial and fraudulent conduct, appellants maintained that

their constant aim was to provide the Lakewood members

with all that had been promised. To support that claim,

appellants were permitted to introduce evidence tending

to show efforts, after as well as before the conservator’s

appointment, to extricate the club from its financial diffi-

culties. On the same theory—relevance to good faith—

appellants proffered a post-conservatorship proposition

which, if consummated, would have provided one of several

possible solutions of the problem.

This proposition was an offer, made subject to approval

by the members and the court, to pay appellants $100,000

for their interests in the club, the offeror to complete the

club’s facilities and operate them for the members. The

offer called for the alternative imposition of monthly dues

or a minimum spending requirement upon life members,

the option in this regard to be theirs. The membership,

however, rejected this proposal, and the trial judge ex-

cluded it from the evidence. Because the offer was nego-

tiated after the conservatorship,” and was conditioned

upon a relationship between the members and the club

different from that which appellants had represented, the

® The offer, and the evidence excluded by the rulings considered

in Parts III and IV infra, emanated from transactions occurring

after the appointment of the conservator for the Lakewood-con-

nected corporations. From this circumstance, appellants argue

that the trial judge established the date of the conservator’s ap-

pointment as an arbitrary cutoff point for evidence that might

illuminate appellants’ conduct. We do not find this to be so. Ap-

pellants were permitted to undertake proof of other transpirations

after as well as before the conservatorship. Only with respect to

the offer discussed in this Part did the judge deem the pust-con-

servaiorship character of the proffered item of sufficient importance

to the ruling to justify mention, and even here the ruling also

rested upon an additional consideration.

lla

judge did not consider its virtues sufficient to elevate it

to a good faith showing.

Acts occurring subsequent to a supposed criminal offense

may in particular circumstances constitute admissible evi-

dence bearing on innocence.*' By the same token, an event

superficially indicative of bad faith conceivably may be

shown by a later transpiration to have actually involved a

completely wholesome state of mind.® On the other hand,

an ever-present reason demanding latitude for the ruling

on admissibility is that what takes place, particularly after

the fact, is ‘‘often feigned and artificial.’?** While the

judge's function does not extend to a flat decision as to

whether it is or not, it is his responsibility to calculate

and weigh the propensities of the proffered evidence in

both directions in determining whether it has a ‘‘plus

value’’ favoring its admission.*

Even if, in the case at bar, the trial judge believed that

the proposition in question was free from taint of artificial-

ity, the fact remains that it embodied rights and liabilities

of membership dissimilar to what they had previously

appeared to be. The most salient feature of life member-

ships, as advertised in appellants’ campaign, was their

freedom from additional financial burdens. In specifying

the onus of dues or a minimum spending requirement on

life memberships, the offer departed radically from the

assurances that had inspired their purchase.

Moreover, one of the principal complaints against ap-

pellants was that they concealed their proprietary interests

51 See Starke v. State, 322 Ala.App. 31, 16 So.2d 426, 427 (1944) ;

Boston v. State, 94 Ga. 590, 21 S.E. 603 (1894).

52 See, e.g., Hayes v. United States, 227 F.2d 540, 543 (10th Cir.

1955), cert. denied 353 U.S. 983 (1957).

832 J. Wigmore, Evidence § 293 at 189 (3d ed. 1940).

34 Text supra at note 21.

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in the club and their arrangements for personal profit.

The offer called for the payment of $100,000 to appellants

for those interests, and the vesting of the club’s ownership

and operation solely in the offeror. Viewed, as well it

could be, as a salvage effort by appellants at the expense

of the life members, the proposal had little or no tendency

to demonstrate appellants’ good faith in the dealings to

which the indictment referred.

Ill

We have mentioned that some of the monies collected

from the sale of memberships in Lakewood Country Club

were devoted to projects unrelated to the development of

the club.* One such diversion served a complicated trans-

action involving Golf Contractors, Inc., a Texas corporation

owned by appellants, and Glen Haven Club, Inc., another

Texas corporation. Appellants and Golf Contractors con-

tracted to construct a golf course for Glen Haven, and two

of the Lakewood-related corporations,® then dominated by

appellants, advanced approximately $63,000 to Golf Con-

tractors for the job. This loan, to be liquidated from

Glen Haven’s payments to Golf Contractors, was evidenced

by notes payable to Golf Contractors and secured by a

deed of trust on the Glen Haven property.

After appellants were removed from control of the Lake-

wood complex, the Texas club®™ obtained a $500,000 loan.

5 Text supra at note 11.

36 These were Lakewood Country Club, Inc., and Country Club

Developers, Inc. See note 5, supra.

37 Through a change of name accompanying the amendment and

restatement of its articles of incorporation, Glen Haven Club, Inc.,

had in the meanwhile become Sandy Lakes Country Club, Inc.

13a

On settlement of that loan, $52,000°* was deducted and

forwarded to the Lakewood conservator, pursuant to ar-

rangements previously made by him, to enable a release of

Golf Contractor’s deed of trust on the Texas property.®

The Government’s case revealed the $63,000 advance to

Golf Contractors, and appellants sought to show its even-

tual repayment as a circumstance signifying their good

faith and the soundness of the loan from a business view-

point. The trial court, after hearing counsel extensively,

held that they could not do so, and this determination we

are invited to upset.

Appellants’ proffer did not intimate that, aside from

arranging the terms and security for repayment of the

loan, they played any role in connection with the return

of the monies to the conservator.*® The tendered evidence

could hardly have shed light upon appellants’ earlier in-

tentions when the memberships were solicited; at best, it

might have suggested that the advance was a sound busi-

ness investment rather than a reckless disposal of funds.*!

But this fact was also irrelevant for, despite the apparent

safety of the maneuver, it was nonetheless an impermissible

diversion of the club’s cash for appellants’ own gain. They

88 The reason for the discrepancy between the $63,000 borrowed

and the $82,000 repaid is not apparent from the record. Ap-

pellant Post testified that Golf Contractors spent about $102,000

on the Glen Haven course, evidenced by Glen Haven’s notes total-

ling that amount, but only three of the notes, aggregating ap-

proximately $53,000, were placed in evidence. From this we can

only assume that Golf Contractors had some additional source of

funds.

89 Golf Contractors came into the conservatorship several months

after it was established.

4#°So far as the proffer discloses, the arrangement therefor was

made and conducted solely by the Lakewood conservator and the

title insurance company settling the loan.

“1 That fact was inferable from the notes evidencing the promise

to repay and the deed of trust securing the notes, both of which

were placed in evidence at the trial.

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solicited the funds by representing that they would be

devoted to construction of the Lakewood club in Maryland,

but used the funds, with a view to personal profit, for

the construction of the Glen Haven course in Texas. ‘That

the loan was safeguarded, or was eventually repaid, could

not alter the situation; the calculated, improper use of

the money was itself an act of fraud which, when coupled

with the precedent use of the mails to enable its per-

petration, made the offense complete.*? And the fact of

repayment could, in the circumstances, contest neither

the deliberate nature of the digression nor its underlying

motivation.** Moreover, we are alert to the possibility of

which the trial judge was forewarned, that admission of

the evidence would have added a broad collateral area to

an already lengthy and complicated trial.44 We think the

trial judge remained on firm ground in rejecting it.

42 Use of the mails in furtherance of a scheme to defraud consti-

tutes mail fraud, Pereira v. United States, 347 U.S. 1, 8 (1954);

Deaver v. United States, 81 U.S.App.D.C. 148, 151, 155 F.2d 740,

743, cert. denied 329 U.S. 766 (1946), and pecuniary loss by the

victim.is not an element of the offense. Deaver v. United States,

supra, 81 U.S.App.D.C. at 150, 151, 155 F.2d at 742, 748; United

States v. Andreadis, 366 F.2d 423, 431 (2d Cir. 1966), cert. denied

385 U.S. 1001 (1967) ; Adjmi v. United States, 346 F.2d 654, 657

(5th Cir.), cert. denied, 382 U.S. 823 (1965). See also Shaddy

v. United States, 30 F.2d 340 (8th Cir. 1929); Butler v. United

States, 53 F.2d 800 (10th Cir. 1931).

*8 This is particularly true in light of the fact that the funds

were actually returned to Golf Contractors, the Texas company

wholly owned by appellants, not to the Lakewood complex, in

payment of the notes and for release of the deed of trust held by

Golf Contractors, not the Lakewood complex. There was nothing

in the proffer to connect either the security arrangements to

appellants’ dealings on behalf of Lakewood Country Club, as op-

posed to their dealings on behalf of their own corporation, Golf

Contractors.

*The prosecuting attorney informed the trial judge that ad-

mission of the evidence would impel him to demonstrate the con-

servator’s efforts to retrieve the funds, and appellants’ attempts

to interfere with the conservator’s efforts.

15a

Lakewood Country Club’s litigation against appellants -

was terminated by a consent order following a settlement

agreement pursuant to which appellants relinquished their

interests in the Lakewood-connected corporations in ex-

change for a general release from civil liability arising

out of their promotional and managerial activities. The

settlement agreement in part provided:

‘‘Tt is agreed that all sums heretofore disbursed to

or for the benefit of [appellants] or any of them,

and/or their agents, whether corporate or otherwise,

shall be considered to be full and reasonable considera-

tion for any and all services heretofore rendered by

them to . . . Lakewood Country Club, Inc.’’

Appellants sought to introduce this provision into evi-

dence as a recognition by the representatives* of the

allegedly defrauded club members that the monies which

appellants had used personally were but fair compensation

for their services to the club.** This, appellants say, in

turn indicated that the members were satisfied, and bore

importantly upon their good faith while in control of the

club’s affairs. The trial judge disagreed and rejected

the proffer, and we think that he was entirely correct in

doing so.

45 Lakewood Country Club, Inc. v. Post, supra note 13, was a

class action brought by the club’s then directors on behalf of the

club. Lee v. Post, supra note 13, was brought by the conservator.

These actions were later consolidated.

46 Appellants, pointing to the fact that the civil litigation had

been mentioned at the trial, also urge that considerations of fair-

ness dictated admission of the settlement agreement to inform the

jury that their ‘‘final disassociation’’ from the club came in con-

sequence of an inter-parties accord rather than permanent ouster

by the court.. Any need in this regard was supplied by appellant

Post’s testimony that the suit had been settled and that appellants

thereafter had no further association with any of the Lakewood-

related corporations.

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16a

The settlement agreement does not purport to compose

any criminal transgression, and we would deny it legal

effect to that extent if it did.” We do not, however, gain-

say the value to appellants of a showing that they earned

the money which they kept for themselves, nor do we

dispute their contention that evidence of satisfied customers

is admissible in a mail fraud case to show an absence of

fraudulent intent.** But the settlement instrument states,

consistently with what is evident from its context, that its

‘“‘only purpose [is] to prevent further litigation and to

secure a release and discharge of all controversies and

disputes which might exist between the parties by virtue

of the claims asserted, as well as those which might have

been asserted... .’’

In a transaction so obviously a product of the parties’

mutual desire to buy peace, we cannot isolate a reflection

of the members’ satisfaction with appellants’ handling of

the club’s funds, or a recognition of their entitlement to

those which they appropriated.” Relinquishment of rights,

cancellaticn of liabilities, acceptance of unwanted covenants,

and suppression of hostile emotions are commonplace, if

indeed not well nigh inevitable, in the give-and-take of com-

*" See Savitt v. United States, 59 F.2d 541, 544 (3d Cir. 1932) ;

Seals v. United States, 221 F.2d 243, 249 (8th Cir. 1955) ; Com-

monwealth v. Spiegel, 169 Pa.Super. 252, 82 A.2d 692 (1951) ;

State v. Cooper, 120 S.C. 280, 113 S.E. 132 (1922). Cf. Chambers

v. Buroughs, 44 App.D.C. 168, 173-74 (1915), cert. denied 239 U.S.

649 (1916).

“® Worthington v. United States, 64 F.2d 936, 940 (7th Cir. 1933) ;

United States v. Hanrahan, 255 F.Supp. 957, 969 (D.D.C. 1966),

aff’d sub nom. Tynan v. United States, supra note 3.

“Compare Ecklund v. United States, 159 F.2d 81, 83-85 (6th

Cir. 1947).

17a

promise,” and we discern nothing in this situation to

provide an exception. The settlement agreement offered

the triers of fact no clear choice respecting the member-

ship’s real attitude toward appellants’ financial diversions,

and it was well within the province of the trial judge to

refuse to allow the jury to speculate.

V

. Appellants, as we have observed, also challenge the so-

called ‘‘promoter instruction’? by which the trial judge

delineated for the jury’s edification appellants’ obligations

as promoters toward Lakewood Country Club and its

members. They argue for reversal on the ground that

* As Dean Wigmore has stated, a compromise effort “does not

ordinarily proceed from and imply a specific belief that the ad-

versary’s claim is well founded, but rather a belief that the fur-

ther prosecution of that claim, whether well founded or not, would

in any event cause such annoyance as is preferably avoided by the

payment of the sum offered.’’ 3 J. Wigmore, Evidence § 1061 at 28

(3d ed. 1940).

5. The instruction reads:

“*The jury are instructed that a promoter is a person who sets in

motion machinery that brings about the incorporation and organiza-

tion of a corporation, brings together the persons interested in the

enterprise to be conducted by the corporation, aids in inducing

persons to become members of the corporation, and in procuring

from them membership fees to carry out purposes set forth in

the corporation’s articles of incorporation.

**If from the evidence in this case the jury should find beyond

a reasonable doubt that the defendants were promoters of Lake-

wood Country Club, Inc., then you are instructed that the defend-

ants stood in a fiduciary relation to both the corporation as a

separate legal entity and the members, including those persons

who it was to be anticipated would make application to and would

become members in Lakewood Country Club, Ine. Such a fiduciary

relationship on the part of the defendants, should you find them

to be the promoters of the Lakewood Country Club, Inc., required

that they exercise the utmost good faith in their relations with

wa Oe ee ae na Ai atin Una At Mi es «nln acetal tals Si YY OO

am Ale, “3 bun

18a

the promoter concept obtsins in criminal lew only with

respect to stock corporations, and that it bscomes anomalous

when applied to a nonprofit enterprise such as was involved

here. They insist, too, that the instruction equated a breach

of the promoter’s fiduciary duty with the knavery essen-

tial tc a conviction for mail fraud, thereby lowering the

Governmen!’s bur:len of proof. We disagree with each of

these contentions.

By elementary legal principles, promoters stand in a

fiduciary relationship exucing good faith in their intracom-

pany activities and deraanding adherence to a high stand-

the corporation and the members, including fully advising the

corporation and members, and persons who it wes to be anticipated

would become members, of any interest which the defendants had

thet would in any way affect the corporation, the members and

anticipated memvers. Such a fui! disclosure requirement, if you

should find the cefendants to be promoters, would obligate them

to faithfully make known all facts which might have influenced

prospective members in deciding wheilier or rot te narchase mem-

berships. And this fuil disclosure would include the duty to re-

frain from misrepresenting any material facts, as well as the duty

te make known any personal interest the defendants had in any

transaction relating to the country club enterprise.

*““Also you are iastrucied that if you should find beyond a

reasonable doubt that the defendants were promoters of the Lake-

wood Country Club, Inv:, and that the funds obtained by them

from members of the club corporation to accomplish the purposes

of the corporation were used by them for the club’s benefit, they

were properly used. On the other hand, if you should find beyond

a reasonable doubt that the defendants were the promoters of the

club corporation, and that they had intentionally converted those

funds to their own personal use, such would be a «ud on the

members of the club corporation, since such funds were in the

nature of trust tunds as to which the defendants had a fiduciary

obligation. And in that connection you are farther instructed

that for promoters to knowingly use their fiduciary position to ob-

tain secret profits at the expense of the corporation or its members

would not orly be a breach of that fiduciary duty bat an act of

fraud.’’

dee AE TP Rt in DL aA Me RS lal MBIA OR PI dil a: ell) Sa int ahaa

19a

ard of honesty and frankness.” Not the lesser of the pro-

moter’s manifold responsibilities outlaw secret profit-

making and command the dedication of corporate funds

to corporate purposes. And it cannot be doubted that

promoters of stock corporations who employ the mails in

deceitful violation of their fiduciary obligations may incur

the fuli condemnation of the law.“

We perceice no basis, either in !aw or in logic, for restrict-

ing these precepts to stock corporations.“ The under-

girding considerations are equally germane and potent

when a person buys his membership in a nonstock cor-

poration as when stock in a business corporation is pur-

chased. In each case, the purchaser relinquishes his money

in the expectation that it will be used in a manner beneficial

to his interest in the corporation and consistent with the

representations that induced the transaction. We see no

reason why the fiduciary concept, which does service in

mail fraud prosecutions in the context ef both membership

and stock organizations,® should not have the same range

specifically in relation to promoters. We hold that the

promoter of a corporation, whether stock or nonstock, as

& fiduciary owes a corporate constituent, be he stockholder

52 See generally, H. Ballantine, Corporations §§ 356-60 (rev. ed.

1946) ; 1 W. Fletcher, Corporations §§ 192-96 (1963 rev. vol.).

53 Thid.

4 United States v. Painter, 314 F.2d 939 (4th Cir.), cert. dened

374 U.S. 831 (1963). See United States v. Holtzman, 288 F.2d 141

(7th Cir. 1956) ; Bobbroff v. United States, 202 F.2d 389 (9th Cir.

1953).

*’We are unaware of any case treating the applicability of the

promoter concept to a nonstock corporation.

*° See United States v. Groves, 122 F.2d 87, 90 (2d Cir.), cert.

denied 314 U.S. 670 (1941) ; United States v. Hoffa, 205 F.Supp.

710, 716 (S.D. Fla.), cert. denied 871 U.S. 892 (1962).

i

or member, the same duties of good faith and fair deal-

ing.”

We do not quarrel with the doctrines upon which appel-

lants pitch their second protest against the instruction.

Active rather than constructive fraud is prerequisite to

conviction for mail fraud.*® Mere breach of fiduciary ob-

ligation does net itself constitute active fraud; there

must be a specific intent to defraud.” The flaw in appel-

lants’ argument, however, is that the instruction given in

this case is entirely harmonious with these rules. Among

other things, it informed the jury:

‘“f1]f you should find beyond a reasonable doubt that

the defendants were the promoters of the club corpora-

tion, and that they had intentionally converted those

funds to their own personal use, such would be a fraud

on the members of the club corporation, since such

funds were in the nature of trust funds as to which the

defendants had a fiduciary obligation. And in that

connection you are further instructed that for pro-

moters to knowingly use their fiduciary position to

obtain secret profits at the expense of the corporation

or its members would not only be a breach of that

fiduciary duty but an act of fraud.’’™

57 The situation here is essentially unlike that presented in Old

Dominion Copper Co. v. Lewisohn, 210 U.S. (1908), relied on by

appellants. Compare McCandless v. Furland, 296 U.S. 140, 157-59

(1935).

58 Shushan v. United States, 117 F.2d 110, 115 (5th Cir. 1941) ;

Epstein v. United States, 174 F.2d 754, 765-66 (6th Cir. 1949).

59 See Epstein v. United States, supra note 58, 174 F.2d at 766;

United States v. Hoffa, supra note 56, 205 F.Supp. at 715-16.

© United States v. Brandt, 196 F.2d 653, 657 (2d Cir. 1952) ;

United States v. Shavin, 287 F.2d 647, 649-50 (7th Cir. 1961), cert.

denied 375 U.S. 944 (1963); Williams v. United States, 278 F.2d

535, 537 (9th Cir. 1960).

*! The emphasis is supplied.

2la

By explicating a knowledgeable or purposeful breach of

fiduciary duty as an essential characteristic of the conduct

upon which a conviction might be rested, the instruction

plainly and correctly defined a major type of dishonesty for

the facilitation of which the mail fraud statute penalizes

the use of the postal service.”

Our review of appellants’ several claims against the test

of the record thus fails to disclose error. The convictions

are accordingly iis

rmed.

Fany, Senior Circuit Judge, concurring in affirmance: In

my view appellants should have been permitted to show the

eventual repayment of the advance to Golf Contractors,

Ine., discussed in Part III of the court’s opinion. As the

court points out, the notes were secured by deed of trust,

arranged by appellants, on the Glen Haven property. The

full Greumstances of this transaction, of which the jury

were permitted to have only a part, I think were relevant

on the issue of criminality. I do not dissent, however, from

affirmance, deeming this restriction upon the evidence not

so harmful as to call for reversals.

-_e_—__—-<-_—__

*2 See the cases cited supra note 56. See also United States v.

Buckner, 108 F.2d 921, 926-27 (2d Cir.), cert. dented 309 U.S. 669

(1940).