Esplin v. Hirschi, 9718
| Decision Date | 24 March 1969 |
| Docket Number | 9719 and 9800.,No. 9718,9718 |
| Citation | 402 F.2d 94 |
| Parties | Lee J. ESPLIN, K. C. Weaver, Leo Reeve, Arthur Barlocker and Doyle Sampson, Appellants, v. Leland (Lee) HIRSCHI and Laverne Hirschi, Appellees. William A. BARLOCKER, Appellant, v. Leland (Lee) HIRSCHI and Laverne Hirschi, Appellees. Leland (Lee) HIRSCHI and Laverne Hirschi, Cross-Appellants, v. Lee J. ESPLIN, K. C. Weaver, Leo Reeve, Arthur Barlocker, Doyle Sampson and William A. Barlocker, Cross-Appellees. |
| Court | U.S. Court of Appeals — Tenth Circuit |
Hardin A. Whitney, Jr., of Moyle & Moyle, Salt Lake City, Utah, for appellants and cross appellees.
Adam M. Duncan, Salt Lake City, Utah (Parker M. Nielson, Salt Lake City, Utah, on the brief), for appellees and cross appellants.
Before PHILLIPS, HILL and HICKEY, Circuit Judges.
Rehearing Denied in Nos. 9718, 9800 Denied November 6, 1968.
Certiorari Denied March 24, 1969. See 89 S.Ct. 1194.
This action was commenced by Leland and Laverne Hirschi, appellees and cross-appellants here, individually and as a class action, against B & E Securities, Inc., William A. Barlocker, Lee J. Esplin, K. C. Weaver, Leo Reeve, Arthur Barlocker and Doyle Sampson.1 The complaint alleged (1) a violation of 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j; and Rule 10(b)-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, and (2) a violation of the Investment Company Act of 1940, 15 U.S.C. § 80a-1 et seq.
Early in the litigation the trial judge determined the case was not a class action under Rule 23, F.R.Civ.P., as Amended, and dismissed that part of the complaint pertaining thereto.2 The case proceeded to trial with the Hirschis as individual plaintiffs and was submitted to a jury upon special interrogatories pursuant to Rule 49(a), F.R.Civ.P. Based upon the answers of the jury to the submitted interrogatories the trial judge found all of the defendants guilty of the alleged violation of the Securities Exchange Act of 1934 and liable in damages to the Hirschis in the amount of $15,600. The defendants were also found to have violated the Investment Company Act of 1940 but the court determined that the cause of action under the Act was barred by the statute of limitations.
In addition to the appeal by the individual defendants from the part of the judgment awarding damages, the Hirschis have cross-appealed from the dismissal of the class action and the denial of their cause of action under the Investment Company Act.
The defendant, B & E Securities, Inc., is a Utah corporation formed early in 1961 for the original purpose of receiving and holding certain assets owned by the Bank of St. George, the disposal of which had been directed by the bank examiners. The incorporators and original directors of B & E were defendants, William A. Barlocker, Lee Esplin, K. C. Weaver, Leo Reeve and Arthur Barlocker. William Barlocker originally and at all times owned over fifty per cent of the voting stock of B & E. The defendant, Doyle Sampson, was an employee and agent of B & E.
Early in the life of the corporation it was determined that the purposes of the corporation should be expanded to include investment in certain real estate, insurance companies, and a motel corporation. To achieve these expanded purposes the Board of Directors undertook to sell stock in B & E to the public. Accordingly, steps were taken to provide for five hundred thousand shares of common stock, one hundred thousand shares of Class A preferred stock, three hundred thousand shares of Class B preferred stock and one million shares of Class C preferred stock. All the stock was to have a par value of $1.00 per share.
Sometime during September and again in November of 1961, the plaintiffs, Hirschis, were approached by defendant Sampson who told them among other things, that the investment potential of B & E was good and solicited their investment in the capital stock of the company. Pursuant to this solicitation the Hirschis purchased shares of stock in B & E to the extent of $20,800.00.3 The Hirschis received a total of $2,500.00 in dividends on this stock; $500.00 in 1961, $1,000.00 in 1962, and $1,000.00 in 1963. B & E, Inc., was apparently at no time a profitable corporation and its assets became quite heavily encumbered.
In this action filed on December 2, 1965, it was asserted that defendants had violated section 10(b) of the Securities Exchange Act by employing devices, schemes and artifices in selling shares of stock to plaintiffs. It was undisputed that defendants did not deliver a prospectus to any of the investors and that the only written communications received by plaintiffs from the defendants were a letter dated October 24, 1962, giving notice of a special stockholders meeting for the purpose of a stock exchange, an official notice of the special stockholders meeting, a notice of the January 25, 1963, annual stockholders meeting dated December 21, 1962, a letter of October 1, 1963, concerning the reporting of dividends to the Internal Revenue Service and a statement of financial operations and retained earning of B & E Securities, Inc., for the fiscal year ending June 30, 1963.
It was admitted that it was not disclosed to plaintiffs the rights, privileges and preferences of the various classes of securities nor the manner in which the funds or assets of the corporation would be applied if the funds obtained from the issuance of stock were insufficient or the corporation was otherwise unable to engage in its proposed business activities. It was further admitted that neither B & E nor any securities issued by B & E were registered under the provisions of the Investment Company Act of 1940, that the defendant B & E, Inc., never complied with any of the statutory requirements of the Investment Company Act of 1940 and that the sales of the capital stock of B & E, Inc., were never registered with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended.
It was specifically found by the jury in answer to special interrogatories submitted to them that the defendant B & E Securities, Inc., in connection with the sale of securities to plaintiffs made untrue statements of fact and omitted to state facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading and that such misrepresentations or omissions were material.4
The jury further found with respect to plaintiffs' allegations that defendants' actions had concealed the fraudulent omissions and that plaintiffs had been lulled into not presenting an action based on these omissions earlier. The jury held that during the shareholders meeting of January 25, 1963, the plaintiffs first knew, or in the exercise of reasonable diligence and inquiry should have known, about the facts constituting such misrepresentations or omissions and that the plaintiffs should have known on or about May 7, 1962, that B & E Securities, Inc., engaged or proposed to engage primarily in the business of investing, reinvesting and trading in securities. Based upon these findings the trial court determined as a matter of law that plaintiffs were entitled to a judgment against the defendants on their first count but were barred by the statute of limitations from recovering under the second count. The various claims of the parties on appeal raise three basic issues: (1) whether the lower court was correct in dismissing the class action; (2) whether the cause of action based upon the Investment Company Act should have been held to be barred, and (3) whether the trial court applied the correct rule as to the measure of damages to be applied in 10b-5 actions.
This case presents the first occasion for this court to consider the scope of revised Rule 23 of the Federal Rules of Civil Procedure. Rule 23, as Amended, became effective July 1, 1966, and this action was filed in December, 1965. However, the decision on the question of allowing the class action was not made until August, 1966. As a result, the lower court considered it within its discretion to apply either the old or new rule. Inasmuch as the amendment of Rule 23 was intended primarily as a simplification and clarification of the prior rule and because the trial court did consider the new rule, we will review this decision solely on the basis of the rule as amended.5
Rule 23(a) and (b) delineate the factors to be considered in determining the propriety of a class action. The trial court considered, and the parties agree, that the four prerequisites found in Rule 23(a) were present in the instant case. Subdivision (b) establishes three further criteria and requires that one of these be fulfilled before a class action is maintainable. The controversy to be resolved here is whether the provisions of 23(b) (3) were met.6
Before a class action can be established under (b) (3) it is necessary to find, first, "that the questions of law or fact common to the members of the class predominate over any questions affecting only individual members," and second, "that a class action is superior to other available methods for the fair and efficient adjudication of the controversy."7
The lower court found, that as to the 10b-5 count, the individual questions involving the dissimilarity of oral representations, the issue of reliance and the matter of knowledge sufficient to invoke the statute of limitations, were the primary issues presented.8 Consequently the court was of the opinion that the common questions did not predominate. "If there could be thought some question about this, the difficulties likely to be encountered in the management of the class action in this case, and the relatively limited benefits, if any, such an action could accomplish at greatly increased burden, have persuaded me to exercise whatever discretion I possess in proceeding otherwise."9 The trial...
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