476 F.2d 393 (9th Cir. 1973), 71-1510, Walling v. Beverly Enterprises

Docket Nº:71-1510.
Citation:476 F.2d 393
Party Name:Dean WALLING et al., Plaintiffs-Appellants, v. BEVERLY ENTERPRISES, a California corporation, Defendant-Appellee.
Case Date:April 09, 1973
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit

Page 393

476 F.2d 393 (9th Cir. 1973)

Dean WALLING et al., Plaintiffs-Appellants,


BEVERLY ENTERPRISES, a California corporation, Defendant-Appellee.

No. 71-1510.

United States Court of Appeals, Ninth Circuit.

April 9, 1973

Page 394

[Copyrighted Material Omitted]

Page 395

John P. Hanrahan (argued), Los Angeles, Cal., for plaintiffs-appellants.

Thomas H. McGovern (argued), William F. Rinehart, H. Stephen Cranston, MacDonald, Halsted & Laybourne, Los Angeles, Cal., for defendant-appellee.

Before MERRILL, HUFSTEDLER, and CHOY, Circuit Judges.

CHOY, Circuit Judge:

Appellants (West Texas Shareholders), owners of all the shares of West Texas Medical Center, Inc. (West Texas), a Texas corporation, brought this action against Beverly Enterprises (Beverly), a California corporation, for alleged violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), 1 and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, 2 and for breach of contract. Federal jurisdiction is based solely on the securities law violations. 3


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The district court held that West Texas Shareholders had failed to state a claim for relief under federal securities law and therefore dismissed the action for lack of subject matter jurisdiction. The validity of this ruling is the sole issue presented on appeal. We reverse.

The federal securities claim asserted by West Texas Shareholders arose from an agreement dated August 26, 1969, between Beverly and West Texas Shareholders, for an exchange of all of the common stock of West Texas for common stock of Beverly. The total value of the Beverly stock consideration, $2,700,000, was payable in one down payment and three annual installments. Each of the four payments was to have a fixed value of $675,000 and the number of shares to be issued representing each payment was to be determined by the average closing price of Beverly stock on the American Stock Exchange during the ten day trading period preceding the payment date of the installment. Thus, substantial fluctuations in the trading price of Beverly stock would have a significant effect on the consideration West Texas Shareholders were to receive.

The arrangement, however, was never consummated because Beverly refused to proceed, claiming that it had received information that West Texas's hospital building was in need of major repair and that it could not obtain a firm commitment from its own insurance carrier to include West Texas within its insurance plan. West Texas Shareholders attempted to accommodate Beverly, but the parties were unable to settle their differences and this suit was filed.

In reviewing a dismissal of a complaint for failure to sufficiently allege jurisdiction, we must accept the allegations in the complaint as true. Vine v. Beneficial Finance Co., Inc., 374 F.2d 627 (2nd Cir.) ,

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cert. denied, 389 U.S. 970, 88 S.Ct. 463, 19 L.Ed.2d 460 (1967); 2A J. Moore, Federal Practice ¶ 12.08 (2d ed. 1972). Disregarding the inordinate verbiage in their amended complaint, West Texas Shareholders in substance allege that Beverly entered into the reorganization agreement with the intent not to perform its obligations unless it later determined that it was in its best interests to do so, and that Beverly intended to raise and did raise fictitious excuses for refusing to fulfill the agreement. Alternatively, West Texas Shareholders allege that Beverly executed the agreement with the intent to speculate on fluctuations of the price of its stock at the expense of West Texas Shareholders, 4 and that Beverly executed the agreement with the intent of refusing to consummate the reorganization unless it could obtain additional concessions from them to which it was not legally entitled. West Texas Shareholders also allege that Beverly established a pattern in its acquisition program of entering into other reorganization agreements with stockholders of other corporations with only a limited intention of performing. West Texas Shareholders contend that the above actions constitute acts, practices, or a course of business which operated as a fraud or deceit upon them under § 10(b) and Rule 10b(5).

We must decide whether entering into a contract to sell securities with only a limited intention of performing is a fraud cognizable under § 10(b) and Rule 10b-5 and whether the allegations of fraud in this complaint are sufficiently well pleaded. 5 We hold that the district court erred in dismissing this action.

At the outset we note that "[s]ection 10(b) must be read flexibly, not technically and restrictively. Since there was a 'sale' of a security and since fraud was used 'in connection with' it, there is redress under § 10(b), whatever might be available as a remedy under state law." Supt. of Insurance v. Bankers Life & Cas. Co., 404 U.S. 6, 12, 92 S.Ct. 165, 169, 30 L.Ed.2d 128 (1971). "And the fact that the transaction is not conducted through a securities exchange or an organized over-the-counter market is irrelevant to the coverage of § 10(b)." Bankers Life, supra at 10, 92 S.Ct. at 168. Likewise "[n]either § 10(b) nor Rule 10b-5 contains any language which would indicate that those provisions were intended to deal only with fraud as to the 'investment value' of securities . . ." A. T. Brod & Co. v. Perlow, 375 F.2d 393, 396-397 (2nd Cir. 1967).

Proceeding on the assumption that the allegations in the complaint are true, and that any ambiguities must be resolved in favor of the pleading, Gillibeau v. City of Richmond, 417 F.2d 426, 430 (9th Cir. 1969), it seems clear that West Texas Shareholders have stated a claim which the district court had jurisdiction to entertain. Entering into a contract of sale with the secret reservation not to fully perform it is fraud cognizable under § 10(b). 6

We think the case at bar is governed by the rationale expressed in Perlow, supra and Commerce Reporting Co. v....

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