Ayers v. Wolfinbarger, 73-1700.

• Decision Date: 06 May 1974
• Docket Number: No. 73-1700.,73-1700.
• Parties: Hoyt AYERS, on behalf of himself, etc., Plaintiffs-Appellees, v. Rick WOLFINBARGER et al., Defendants, Maurice Olen, Crown Services Corporation, United Services Association of Alabama, Inc., Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

491 F.2d 8 (1974)

Hoyt AYERS, on behalf of himself, etc., Plaintiffs-Appellees, v. Rick WOLFINBARGER et al., Defendants, Maurice Olen, Crown Services Corporation, United Services Association of Alabama, Inc., Defendants-Appellants.

No. 73-1700.

United States Court of Appeals, Fifth Circuit.

March 14, 1974.

Rehearing and Rehearing Denied May 6, 1974.

Morris K. Sirote, Birmingham, Ala., for defendants-appellants.

J. Vernon Patrick, Jr., Marvin Cherner, Birmingham, Ala., for plaintiffs-appellees.

Before BELL, DYER and SIMPSON, Circuit Judges.

Rehearing and Rehearing En Banc Denied May 6, 1974.

DYER, Circuit Judge:

In this derivative and stockholders class action, which sought damages for violations of the federal and state securities laws,¹ Crown Services Corporation and United Services Association of Alabama, Inc., two companies controlled by Maurice Olen, were alleged to be underwriters and controlling persons of Diversoco, Inc., the shares of which were ultimately sold to the plaintiffs through fraudulent misrepresentations and omissions. From a judgment for the plaintiffs, entered upon jury verdicts, Olen, Crown and United appeal. We conclude that there was insufficient evidence to sustain the verdicts and judgment and accordingly reverse.²

On February 1, 1966, The First National Financial Corporation of Alabama was granted a corporate charter under the laws of Alabama with an authorized capital of one million shares with a par value of ten cents per share. On February 2, 1966, the corporate name was changed to Second National Financial Corporation of Alabama. Crown, a Florida corporation, and United, an Alabama corporation, were the organizers of First National and Second National. Olen was president of and controlled both Crown and United. Crown purchased 100,000 shares and United purchased 145,250 shares of Second National at ten cents per share. United also subscribed to an additional 255,000 shares.

Second National filed a registration statement with the Alabama Securities Commission and on July 15, 1966, made a public offering under its prospectus to sell 400,000 shares at one dollar per share to residents of Alabama. From that date to November 2, 1966, Second National sold about 28,000 shares to twenty-six residents of Alabama at one dollar per share.

In September 1966, Olen was indicted and pled guilty to violations of the federal securities and mail fraud laws in matters unrelated to the Second National offering. Because the Second National prospectus showed Olen to be in a position to control the company's affairs, his counsel advised him to terminate the offering made by Second National in the prospectus of July 15, 1966, by either selling Crown's and United's stock in Second National, coupled with a requirement that the purchaser make a tender offer to the other stockholders to purchase their interests for the price paid by them for the stock, or by making a refund to all stockholders of Second National for the full amount of the purchase price paid by them.

In October 1966, Olen discussed with Wolfinbarger his desire to dispose of the stock held by Crown and United in Second National. Wolfinbarger was then Chairman of the Board of First American Life Insurance Company of Mobile, Alabama. The Insurance Commissioner of Alabama had declared the capital of First American to be impaired and had prohibited it from selling insurance or selling its stock. Among First American's stock salesmen were Withrow, Marine and Niesen. Wolfinbarger and the three stock salesmen discussed a proposed purchase of the Second National stock held by Crown and United that Wolfinbarger had negotiated with Olen. It was finally agreed however, that Wolfinbarger would draw from the transaction and that Withrow, Marine and Niesen, none of whom knew Olen, would acquire the stock of Second National from Crown and United.

On November 2, 1966, a stock purchase agreement was entered into, by the terms of which United sold 144,750 shares and Crown sold 100,000 shares of Second National to Withrow, Marine and Niesen for ten cents per share or a total of $24,475.00. Of this total purchase price $5,075.00 was payable in cash, and the balance of $19,400.00, together with interest at six percent, was evidenced by a promissory note payable in the amount of $2,400.00 on November 16, 1966, and beginning on December 12, 1966, in monthly installments of $1,463.13 until the note was satisfied. As security for the payment of the unpaid purchase price the agreement provided for the escrow of the stock and further provided inter alia:

4. Security for Payment of Purchase Price.

* * * * * *

All rights in connection with or incident to the ownership of such shares of stock shall be vested solely in the Buyers, subject to the provisions of the Escrow Agreement and the rights of the Sellers as pledgees.

* * * * * *

In the case of default . . . by the Buyers, the Sellers shall have the rights as heretofore outlined as well as all rights contained in the promissory note, but strictly subject to Sellers giving Buyers written notice of any such default in the terms and conditions of the aforesaid promissory note by Certified Mail . . ., and further provided that if said payment is made within ten (10) days of the receipt by Buyers of such Certified Mail notice it shall be accepted by Sellers without penalty, acceleration of said promissory note or forfeiture of any security hereby pledged; . . .

9. Representations of Buyers. The Buyers do hereby warrant and agree with the Sellers that:

(a) Each of the Buyers is a bona fide resident of the State of Alabama.

(b) The Buyers will, at closing, make an offer in writing to all parties that purchased stock of the Company by public offering made by Company to purchase from them immediately for cash their shares of stock in the Company and their outstanding subscriptions to stock of the Company on the basis per share they paid for such stock. Buyers agree to make the same offer to the original Directors of the Company.

The promissory note executed by the purchasers contained the ten-day notice requirement provided in the stock purchase agreement.

The escrow agreement permitted stock to be withdrawn by the purchasers in proportion to the payment of any installment of the purchase price, provided that 50,750 shares would not be released until the last monthly payment was made. So long as they were not in default, the purchasers were given the right to vote the stock held by the escrow agent.

At the time of closing on November 2, 1966, Withrow, Marine and Niesen also executed and delivered to United a promissory note for $25,525.00 payable in monthly installments of $542.36 beginning on December 12, 1966, the consideration for which was an assignment by United to the purchasers of United's right to purchase 255,250 shares of Second National for ten cents per share. Contemporaneously, by an exchange of letters dated November 2, 1966, Withrow, Marine and Niesen agreed to pay Second National ten cents per share on all sales by them of either the subscription rights assigned to them by United, or upon the exercise by them of the subscription rights resulting in the issue of Second National stock to them. This payment was in addition to the payment of the $25,525.00 to United for the assignment of United's subscription rights to 255,250 shares of Second National stock. United, on the other hand, agreed that if Withrow, Marine and Niesen, the purchasers of the subscription rights, notified it in writing that Second National had canceled the subscription rights and relieved United from any liability for the payment of its subscription obligation, United would, in turn, declare the remaining sums at that time due and owing under the promissory note as having been paid and satisfied.

All of the officers and directors of Second National resigned on November 2, 1966, and thereafter took no part in its affairs. New officers and a new board of directors were elected, none of whom had any connection with Crown, United or Olen. Subsequently, the name of Second National was changed to Diversoco, Inc., and the home office of the company was moved from Mobile to Birmingham, Alabama.

Twenty-six stockholders had subscribed to 28,725 shares in Second National subsequent to the publication of the July 15, 1966, prospectus and before the November 2, 1966, stock purchase agreement for which shares they had paid to the company $14,725.00.³ On November 3, 1966, these stockholders were informed by letter of the stock purchase agreement, and an offer was made to purchase all of the shares owned by them in Second National at their per share cost. An offer was also made to assume the obligation of these stockholders under the terms of any outstanding subscription agreement which they might have made with Second National. Although the record is not entirely clear, it appears that between 10,000 and 16,000 shares were repurchased from the stockholders at their actual cost by Withrow, Marine and Niesen, shortly after November 3, 1966.

The 244,750 shares purchased by Withrow, Marine and Niesen from Crown and United were held in escrow for over two years and were never sold to the public. During the escrow period the purchasers were late in making the installment payments on two or three occasions, but the sellers gave no notice of default. All of the shares were finally released to the purchasers on March 2, 1968.

Once the purchasers gained control of Diversoco, Inc., they exercised their subscription rights bought from United (for which they were obligated to pay United and Diversoco ten cents each per share) and sold as a secondary offering 226,707 shares at fifty cents per share or $113,353.00.⁴ Principally on the basis of a Diversoco prospectus dated September 30, 1967, the primary issue of 400,000 shares was sold to the public for one dollar per share.

On and after November 2, 1966, when Withrow, Marine and Niesen took...