Los Angeles Trust D. & Mtg. Exch. v. SECURITIES & E. COM'N

• Decision Date: 30 March 1959
• Docket Number: No. 16245.,16245.
• Citation: 264 F.2d 199
• Parties: LOS ANGELES TRUST DEED & MORTGAGE EXCHANGE, Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Markets, David Farrell, Oliver, J. Farrell, Roy A. Bonner, Thomas Wolfe, Jr. and Stanley C. Marks, Appellants, v. SECURITIES AND EXCHANGE COMMISSION, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

264 F.2d 199 (1959)

LOS ANGELES TRUST DEED & MORTGAGE EXCHANGE, Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Markets, David Farrell, Oliver, J. Farrell, Roy A. Bonner, Thomas Wolfe, Jr. and Stanley C. Marks, Appellants, v. SECURITIES AND EXCHANGE COMMISSION, Appellee.

No. 16245.

United States Court of Appeals Ninth Circuit.

February 17, 1959.

Rehearing Denied March 30, 1959.

Paul J. Foley, Los Angeles, Cal., for appellants Trust Deed & Mortgage Exchange and David Farrell.

Morgan Cuthbertson, Laguna Beach, Cal., for appellants, Los Angeles Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Markets, Oliver J. Farrell, Roy A. Bonner, Thomas Wolfe, Jr., and Stanley C. Marks.

Thomas G. Meeker, Gen. Counsel, David Ferber, Asst. Gen. Counsel, Pace Reich, Atty., Securities & Exchange Commission, Washington, D. C., F. E. Kennamer, Jr., Chief Enforcement Atty., S. F. Regional Office, Securities & Exchange Commission, San Francisco, Cal., for appellee.

Before STEPHENS, Chief Judge, and HEALY and BARNES, Circuit Judges.

BARNES, Circuit Judge.

The Securities and Exchange Commission (sometimes hereinafter referred to as the SEC) filed a complaint for an injunction against three corporate defendants: Los Angeles Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Exchange, and Trust Deed & Mortgage Markets, to prevent the sale of certain alleged securities.¹

An answer was filed generally denying all allegations in the original complaint.

Pursuant to order of court duly obtained, the plaintiff filed on October 8, 1958, an Amended and Supplemental Complaint.

Count I was the same in the Amended Complaint as in the original. Count II added the following material facts as having not been stated by defendants to their customers: (e) "the losses sustained by investors"; (f) the sources of the funds used to inventory or "warehouse" notes secured by deeds of trust; (g) the financial condition of the corporate defendants; (h) the fact that this action had been brought by the SEC; (k) the background, integrity, and qualifications of the officers and personnel of the corporate defendants.

Counts III and IV in the Amended Complaint were enlarged by reference to and inclusion of enlarged Count II, and Count V remained the same.

Said Amended Complaint also alleged for the first time that the three corporate defendants "have been and now are insolvent and unable to meet their current liabilities, and the funds received * * * by defendants from investors under the `Secured 10% Earnings Program' have been and are now in jeopardy."

On the same date, October 8, 1958, when the Amended and Supplemental Complaint was filed, the SEC enlarged its demands, by separate petition, demanding a preliminary injunction and the appointment of a receiver. The Amended and Supplemental Complaint prayed for a final judgment restraining the three corporate defendants and their officers from using the mails or any means or instruments of transportation or communication in interstate commerce to sell or offer to sell said securities, "namely, evidences of indebtedness, investment contracts or receipts for or guarantees of such securities, issued by the defendants Los Angeles Trust Deed and Mortgage Exchange, Trust Deed and Mortgage Exchange or Trust Deed and Mortgage Markets," without registering the same, or by use of the misrepresentations previously listed, or without taking steps to prevent the statements made from being misleading, or by using the word "exchange"; and the appointment of a receiver.

Several affidavits and a supplemental affidavit were filed in support of this motion by the SEC, and affidavits in opposition thereto filed on behalf of defendants.

On October 17, 1958, the district court heard (a) the defendants' motion for an immediate trial; (b) the plaintiff's motion for a preliminary injunction and appointment of a receiver.

Hearing was had and evidence taken on October 17th, 21st, 24th, 27th and 30th, and on November 4th, 6th and 7th, 1958.

Defendants' motion for an immediate trial was granted and trial set for December 9, 1958. From an examination of the transcript of record, however, it appears that the hearing of the motion for appointment of receiver developed into a full scale hearing of many, if not all, issues raised by the amended complaint and the plaintiff's motions.

On November 7, 1958, the court below issued a preliminary injunction and appointed a receiver. No findings of fact or conclusions of law were made by the district judge, although the court's order provided that it "reserves jurisdiction to amend and supplement the preliminary injunction, and order appointing receiver by definitive findings of fact, conclusions of law, and further order to be settled before the Court on or before November 13th, 1958."

After an order shortening time was made,² Findings of Fact and Conclusions of Law were signed and filed on November 12, 1958.³

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The November 12, 1958, order for preliminary injunction and order appointing receiver contained an order that it "be and it is entered as of November 7th, 1957," (One year before the date of the original restraining order) and "is intended by the Court to supersede the Preliminary Injunction and Order Appointing Receiver signed by the Court on that date." sic So far as we are informed from the record before us, this clerical error has never been corrected.

The order of November 7, 1958 granted a preliminary injunction and appointed a receiver without the making of any findings of fact or conclusions of law. This violated the rules of the district court in at least three particulars: (1) it did not set forth the reasons for its issuance; (2) it was not specific in its terms; (3) it did not describe in reasonable detail, but merely by reference to the complaint, the act or acts sought to be restrained. Rule 65(d), Fed.R.Civ. P. Mayo v. Lakeland Highlands Canning Co., 1940, 309 U.S. 310, 316, 60 S.Ct. 517, 84 L.Ed. 774. Appellants filed a timely appeal from the order granting the preliminary injunction and the appointment of the temporary receiver. Fed.R.Civ.P. 73(a) and (b).

Appellants applied to a judge of this Court for a temporary stay of the order for preliminary injunction and the appointment of a receiver. This was temporarily granted on November 13th, 1958, until the matter could be heard by the same panel of judges who heard this appeal. As a result of such hearing, an order staying the preliminary injunction and appointment of receiver was issued, and a further restraining order restricting defendants was issued, and other orders necessary for a speedy hearing of this appeal were made.⁴

On December 14, 1958, appellants filed below their answer to plaintiff's amended and supplemental complaint, raising the question of jurisdiction, denying generally all allegations and raising four affirmative defenses.

Before we consider specifically the points relied on by appellants on this appeal, we comment generally on certain facts disclosed by the record.

(1) The SEC has alleged its causes of action against three corporate defendants: Los Angeles Trust Deed & Mortgage Exchange; Trust Deed & Mortgage Exchange; and Trust Deed & Mortgage Markets. There is no testimony that Trust Deed & Mortgage Markets, a corporation, has sold anything or offered to sell anything, or has any assets or liabilities or ever has had them, or has ever done any business. There is no testimony that Trust Deed & Mortgage Exchange has sold anything, although in the brochures in evidence, its name was used and it offered to sell. The Los Angeles Trust Deed & Mortgage Exchange has both sold and offered to sell.

(2) The SEC has alleged in its amended complaint that these same three corporate defendants "have been and are now insolvent and unable to meet their current liabilities, and the funds received and being received by defendants from investors under the `Secured 10% Earnings Program' have been and are now in jeopardy."

In appellee's brief there appears the statement: "In any event, we have seen that LATD is insolvent in that it is unable to meet its debts as they mature."

It is of interest to note that despite such contention in the brief as to the one corporate defendant, and the allegation in the complaint as to each of the three corporate defendants, there is no direct and positive finding of insolvency as to any defendant made by the court below, although there is a finding that "the corporate defendants have been and are insolvent at least in the sense that as trustees they have been and are unable to meet their obligations to investors. There is, moreover, substantial evidence to the effect that the corporate defendants have been and are insolvent in the bankruptcy sense." Emphasis added.

The reason no such clear-cut finding of insolvency was made is crystal clear. No evidence appears in the record to substantiate such a finding — in fact little creditable evidence exists to lend it support. The expert for the SEC admitted on cross-examination that the net worth of the Los Angeles Trust Deed & Mortgage Exchange, i. e., the excess of assets over liabilities, showed a positive net worth for each of the four months preceding the hearing (namely, June, July, August and September 1958) of between $131,000 and $193,000. The larger figure was the last month's net worth. An attempt was made by SEC experts to re-evaluate certain assets of the Los Angeles Trust Deed & Mortgage Exchange by applying an arbitrary writedown figure of thirty to forty percent discount below the face amount of the notes involved, because second trust deeds are bought and sold, generally, at a discount. No attempt was made (nor was it possible by reason of time limitations) by SEC representatives to determine what the actual market value of the trust deed notes were, nor the actual discount at which they had been purchased, either (a) by an examination...