Kerbs v. Fall River Industries, Inc.

• Decision Date: 03 October 1974
• Docket Number: No. 73-1640,73-1640
• Parties: Fed. Sec. L. Rep. P 94,788 Jack KERBS, Plaintiff-Appellee, v. FALL RIVER INDUSTRIES, INC., a Colorado corporation, et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 731

502 F.2d 731

Fed. Sec. L. Rep. P 94,788

Jack KERBS, Plaintiff-Appellee, v. FALL RIVER INDUSTRIES, INC., a Colorado corporation, et al.,

Defendants-Appellants.

No. 73-1640.

United States Court of Appeals, Tenth Circuit.

Argued March 20, 1974.

Decided Sept. 6, 1974, Rehearing Denied Oct. 3, 1974.

Arthur W. Zarlengo, Denver, Colo., for defendants-appellants.

Leonard W. Burningham of Moffat, Welling, Paulsen & Burningham, Salt Lake City, Utah (Richard H. Moffat, Salt Lake City, Utah, on the brief), for plaintiff-appellee.

Before DURFEE, ^* Senior Judge, and HILL and McWILLIAMS, Circuit judges.

DURFEE, Senior Judge.

This action arises under Section 10 of the Securities Exchange Act of 1934, 15 U.S.C. 78j, and Rule 10b-5 of the Securities and Exchange Commission, 17 C.F.R. 240.10b-5. Plaintiff, Jack L. Kerbs, seeks to recover $6,200 lost in the course of dealings with defendants, whose conduct, it is alleged, operated a fraud or deceit upon him. Following a trial to the court, judgment was entered in plaintiff's favor against defendants Marlin H. Thompson, Fall River Industries, Inc. and Securities Transfer, Ltd. ¹ Defendants appeal contending (a) that the evidence adduced at trial was insufficient to support the trial court's findings of fact, and (b) that such evidence, in any event, failed to establish any of the elements required to make out a case under Section 10 and Rule 10b-5.

The complaint included the following allegations: that one Dial and Thompson met with plaintiff on two occasions during the latter months of 1971 and early months of 1972, and that at said meetings they induced plaintiff to enter into an agreement whereby plaintiff would obtain a loan from the Utah State Employee's Credit Union in the amount of $10,000; that said funds were to be divided between Dial, who was to receive $6,200, and plaintiff, who was to retain the balance; that as security for said agreement Dial assigned, transferred and delivered to plaintiff a stock certificate, No. N887, for 25,000 shares of the capital stock of defendant Fall River Industries, Inc.

It was further alleged that during the course of the aforementioned meetings defendant Thompson represented himself to plaintiff as president of Fall River Industries; that at all times defendant Thompson acted in concert with Dial, and acted on behalf of himself and as an officer or agent of defendant Fall River Industries; that on two occasions during the course of these negotiations plaintiff telephoned defendant, Securities Transfer, Ltd. (the transfer agent for Fall River Industries), and inquired as to the status of stock certificate No. N887 of said corporation, and that on both occasions plaintiff was informed that said stock certificate represented free-trading stock; that in reliance upon the representations of each of the defendants plaintiff entered into the agreement with Dial and accepted the Fall River Industries' stock certificate, which was represented by each and every defendant as being a valid and true stock certificate; that Securities Transfer, Ltd. subsequently notified plaintiff that said stock certificate was not a part of their records; that all of the foregoing acts of defendants constitute a scheme or artifice to defraud plaintiff; that all of the defendants engaged in acts which operated a fraud upon plaintiff; that said acts involved the use of an instrumentality of interstate commerce and the mails; and that as a result of the representations of Dial, Thompson and Fall River Industries, and of the refusal of Securities Transfer, Ltd. to transfer stock certificate No. N887, he was damaged in the amount of $6,200.

Defendants denied the alleged misconduct, but admitted that Securities Transfer refused to transfer certificate No. N887 because said certificate had been stolen and was not a part of the transfer agent's records.

Plaintiff and defendant Thompson were the only two witnesses to testify at trial.

Kerbs told of his course of dealings with defendants, and of three meetings at which Glen Dial and Marlin Thompson were present. He stated that a few days prior to the first meeting Dial and another person had approached him to discuss an arrangement whereby Kerbs would use certain Fall River Industries stock as collateral for a bank loan. Kerbs would keep part of the proceeds of the loan, in order to relieve himself of certain financial difficulty, and he would turn over the remainder of said proceeds to Dial. The first meeting at which Thompson was present was conducted in a motel room in January, 1972; the meeting had been arranged by telephone. It was during this first assembly at the motel room that Dial transferred Fall River stock certificate No. N887 to Kerbs. The certificate showed that Danny W. Cress was its owner; it was for 25,000 shares. There was a general discussion between Dial and Kerbs concerning the value of Fall River stock, and concerning the use of certificate No. N887 as security for the anticipated loan. Kerbs testified that he had no specific conversation with Thompson at this time, except for a greeting, but that Thompson was present during the discussion between himself and Dial. Kerbs stated that he was aware at this time of Thompson's position as president of Fall River Industries, in that Thompson's signature and office appeared on the face of the stock certificate transferred and delivered to him.

Kerbs further testified that, prior to finalizing his loan with the Utah State Employee's Credit Union, he had telephoned the American National Bank in Denver, Colorado, and had received verification of the signature of Danny W. Cress, which appeared on the stock power and assignment. An officer of that bank had guaranteed Cress' signature. Kerbs stated that he also had had a telephone conversation with a party in the office of defendant Securities Transfer in Florida to check the validity of stock certificate No. N887.

The amount of the loan actually obtained by Kerbs from the credit union was $9,800. Kerbs received a check for $6,200, and the balance of $3,600 was handled as an accounting transaction, representing the amount already owed by Kerbs to the credit union. Kerbs testified that four or five days after the first meeting with Dial and Thompson, and subsequent to his receipt of the loan payment, he returned to the same motel room and gave Dial a personal check for $6,200. Thompson had temporarily left the room to purchase a 'pop,' and had returned. Dial and Kerbs proceeded to the latter's bank where Dial endorsed Kerbs' check and received a cashier's check from the bank in the amount of $6,200.

Kerbs also stated that when he next met with Dial and Thompson, Thompson delivered to him another stock certificate of Fall River Industries, certificate No. N888, as well as another stock power and assignment. It was Kerbs' understanding that this certificate was to be used for a loan arrangement similar to that involving certificate No. N887. Certificate N0. N888 also showed its owner to be Danny W. Cress, and it was also for 25,000 shares. Kerbs stated that he had a discussion with Thompson at this point in time, lasting about fifteen minutes or so, concerning Fall River Industries. ² Subsequently, on February 1, 1972, Kerbs returned to the motel room, where Dial, the only one present at the time, signed a document acknowledging receipt back of stock certificate No. N888. It was on this occasion that Dial and Kerbs executed their written agreement concerning stock certificate N0. N887. That agreement provided that in consideration of the loan obtained by Kerbs, the proceeds of which were divided between Dial and Kerbs, Dial thereby assigned, transferred and delivered to Kerbs stock certificate No. N887; that it was understood that if Dial should fail to pay to Kerbs the sum of $6,200 together with interest, by May 1, 1972, that Kerbs would have the right to sell sufficient shares to pay for the $10,000 indebtedness; and further that Kerbs would retain, for his own benefit, 2,000 shares of said capital stock.

Thompson testified on behalf of defendants. He stated that he had become president of Fall River Industries in September, 1969, and that he was president at the time the transactions involved in this lawsuit were taking place. He testified that he sold his interest in Fall River Industries in January or February of 1972. Thompson described Dial as a friend and a business associate. He occasionally shared the same motel room with Dial, and met with him on almost every occasion when he was in Salt Lake City, Utah. Thompson testified that Dial had occasional access to the files of the company, that Dial was at one time vice-president of Fall River Industries, and that Dial did not own any shares of Fall River capital stock.

Thompson further testified that stock certificate No. N887 was a forged certificate, and that it was not an authorized and issued certificate of Fall River Industries; that he had no knowledge as to how Dial came into possession of the certificate, and that he believed it had been in the possession of Securities Transfer, Ltd.; that Danny W. Cress, whose name appeared on both stock certificates Nos. N887 and N888, was his stepson; that Danny W. Cress was not the owner of certificate No. N887 in the amount of 25,000 shares, but that the signature of Cress appearing on the stock power and assignment appeared to be valid.

Thompson denied any knowledge of dealings between Dial and Kerbs, and of the transactions between them. He stated that he was present in the motel room with Dial when a particular person was engaged in conversation with Dial, but that he had paid no attention to the person or to the discussion. Thompson also denied that he delivered stock certificate No. N888 to Kerbs, but stated that on one occasion he delivered a manila envelope, the contents of which were unknown to him, to an unknown person through the door of the motel room where Dial was...