614 F.2d 1372 (5th Cir. 1980), 77-2476, Alley v. Miramon

Docket Nº:77-2476.
Citation:614 F.2d 1372
Party Name:Robert L. ALLEY, Plaintiff-Appellant Cross-Appellee, v. Louis MIRAMON, Jr., et al., Defendants-Appellees Cross-Appellants.
Case Date:April 10, 1980
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

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614 F.2d 1372 (5th Cir. 1980)

Robert L. ALLEY, Plaintiff-Appellant Cross-Appellee,

v.

Louis MIRAMON, Jr., et al., Defendants-Appellees Cross-Appellants.

No. 77-2476.

United States Court of Appeals, Fifth Circuit

April 10, 1980

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Henry L. Klein, New Orleans, La., for plaintiff-appellant cross-appellee.

Jarrell Godfrey, Jr., New Orleans, La., for defendants-appellees cross-appellants.

Appeals from the United States District Court for the Eastern District of Louisiana.

Before WISDOM, GOLDBERG, and HENDERSON, Circuit Judges.

WISDOM, Circuit Judge:

In this securities fraud case, we are confronted with the task of resolving legal issues that turn on confusing and vigorously disputed facts. In essence, the question is whether the district court properly awarded the plaintiff, Robert L. Alley, damages under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1976) (1934 Act) and its implementing Rule 10b-5, 17 C.F.R. § 240.10b-5 (1979), in connection with a fraudulent sale of securities.

In May 1975, Alley filed suit against Louis Miramon, Jr., and other directors of Maison Miramon, Inc., alleging violations of Section 10(b) of the 1934 Act and Rule 10b-5. Alley maintained that Miramon, the secretary-treasurer and controlling shareholder of Maison Miramon, fraudulently induced him to transfer his stock certificate representing 200 shares in the Maison Miramon corporation by representing that the corporation needed to pledge the shares as collateral for a loan. The corporation did not pledge the shares; instead, the corporation issued 200 shares to Miramon. Several months after Alley surrendered his certificate, the directors and shareholders of Maison Miramon, without notifying Alley, changed the name of Maison Miramon to Greenbriar Nursing Home, Inc., and dissolved the successor corporation. Alley did not receive any of the liquidation proceeds.

The district court found that "the transfer of Alley's stock to Miramon on the pretense that (the stock) was needed as a pledge to obtain a corporate loan was a 'sale' within the meaning of the Securities Exchange Act of 1934 as was the subsequent sale of the (corporation's) assets". The district court held that the "sales" violated Section 10(b) of the 1934 Act and entered judgment against the defendant. Alley was awarded a pro rata share of the net liquidation proceeds. Alley appealed. He maintains that he should be awarded the entire proceeds of the liquidation because he was the only owner of validly issued shares of Maison Miramon. The defendant directors cross-appealed. Miramon, on behalf of the cross-appellees, contends that Alley is entitled to no damages because he was not a bona fide shareholder in the corporation. Miramon also contends that Alley did not prove a cause of action under Section 10(b) and Rule 10b-5. We affirm.

I.

In examining the evidence in this case, we find ourselves in a quagmire. Maison Miramon, Inc., was managed with little attention to corporate formalities. Louis Miramon, Jr., formed the corporation in May 1968 upon the encouragement of an attorney, Robert R. Thorne, to facilitate the construction of a nursing home in Slidell, Louisiana. 1 The record shows that the nursing home was constructed and financed with the assistance of the Small Business Administration (SBA) and St. Tammany Redevelopment Association, Inc. (Association), a non-profit Louisiana corporation. Apparently Maison Miramon transferred $55,000 to the Association and the Association used the money to purchase a tract of

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land from Miramon. 2 The Association, with Thorne's assistance, obtained an SBA guaranteed construction loan from a local lending institution and engaged Miramon Construction Company, Inc., to build the 60-bed nursing home on the land purchased earlier from Miramon. 3 Upon completion of the construction, the Association conveyed the nursing home and the real estate to Maison Miramon. 4

The record does not show clearly how Maison Miramon was capitalized. The corporation charter authorized capital of $100,000, represented by 2,000 shares of voting common stock with a par value of $50 a share. The charter states that Charles F. Huesman, the corporation's president and director, subscribed to 19 shares. This subscription was not paid and the shares were never executed or issued. Louis Miramon subscribed to 76 shares. Miramon's wife, Gloria Miramon, the vice-president and director, subscribed to five shares. These 81 shares were issued, but the parties contest whether the subscriptions were paid. 5 The corporation executed and issued Certificate No. 4, representing 1,029 shares, to Louis Miramon. Whether Miramon contributed capital for these shares is also disputed. 6 The corporation executed and issued Certificate No. 6, representing 320 shares, to Miramon's mother, Mrs. Louis G. Miramon, Sr., apparently in connection with her $25,000 personal loan to Miramon. 7 Certificate No. 5, representing 200 shares, was executed and issued to Robert Thorne, the corporation's attorney, in consideration for legal services. 8 These 200 shares are the subject of this lawsuit.

After holding Certificate No. 5 for a short period, Thorne conveyed his 200 shares to Alley in satisfaction of an antecedent debt. 9 Alley testified that two years later, in June 1971, Miramon informed him that the corporation planned to build an addition to the nursing home and needed Alley's shares as collateral for a construction loan. Alley also received a letter from Thorne stating that the transfer of Alley's shares to the corporation was necessary to close the loan. Miramon says he never communicated directly or indirectly with Alley regarding a loan for an addition to the nursing home and did not represent that Alley's shares were needed as collateral for such a loan. According to Miramon, he requested Thorne to obtain Alley's certificate and to transfer it to the corporation because the 200 shares originally had been illegally issued to Thorne.

Alley complied with the requests of Miramon and Thorne. The corporation issued Alley Certificate No. 7 representing 200 shares, as a replacement for Certificate No. 5, and he transferred the replacement certificate, indorsed in blank, to Miramon. The district court found that Alley had transferred Certificate No. 7 to Miramon under an agreement that the corporation would later pledge the shares to a lending institution. This finding is supported by the testimony of Alley and Thorne, and by Thorne's letter. The finding is not clearly erroneous.

Despite the agreement between Alley and Miramon, Maison Miramon never pledged Alley's stock as collateral for a commercial loan. On a date not reflected in the record,

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but apparently after the transfer from Alley, the corporation issued 200 shares to Miramon. Miramon testified that Alley remained a shareholder on the corporate books after these transactions.

In November 1971, the shareholders and directors of Maison Miramon, without notifying Alley, changed the corporation's name to Greenbriar Nursing Home, Inc. Greenbriar Nursing Home executed and issued to Miramon Certificate No. 1 representing 700 shares. In December 1971, Miramon called a special meeting of shareholders of Greenbriar Nursing Home, resolved to liquidate the corporation, and appointed himself corporate liquidator. Greenbriar sold its assets to Miramon. Miramon reconveyed the assets and converted the net proceeds of $158,867 to his own use with no accounting to Alley. After learning of the liquidation of the corporation, Alley filed suit in state court to recover damages that resulted from the liquidation. Apparently, Alley abandoned his state court claim and brought this action in the district court.

II.

The principal issue in this case is whether Alley established a cause of action under Rule 10b-5. Under Rule 10b-5, it is unlawful for any person directly or indirectly, by use of any means or instrumentality of interstate commerce, or the mails, to employ any device, scheme, or artifice to defraud or to engage in any fraudulent or deceptive act in connection with the purchase or sale of a security. 10 We must determine, therefore, whether Alley proved that Miramon defrauded him in connection with a sale of securities. 11 Alley must also, of course, have proved resultant damages.

Before examining the elements of Alley's Rule 10b-5 action, we address Miramon's argument that Alley could not have been a "seller" of securities because he never owned validly issued shares in Maison Miramon. Miramon says Alley's shares were invalid because they were illegally executed and issued to Thorne, Alley's transferor. The nature of Thorne's capital contribution is unclear. Miramon maintains that the corporation issued Certificate No. 5, representing 200 shares, to Thorne in consideration for legal services rendered in obtaining SBA guaranteed financing for the nursing home. Thorne also received a $3500 SBA approved fee from the corporation for his services. Since federal regulations prohibit the payment of an unapproved contingent legal fee for services rendered in obtaining SBA financing, Miramon argues that the 200 shares were illegally issued to Thorne. 12

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Alley, as a transferee of these shares, therefore, was not a bona fide stockholder.

Assuming that Thorne's 200 shares were illegally issued, the argument that Alley was not a stockholder fails for two reasons. First, Alley received the shares from Thorne in consideration for the cancellation of a $10,000 debt. At the time of the transfer, Certificate No. 5 was complete on its face and was signed by the required corporate officers. Thorne presented no evidence that Alley knew or had reason to know that these shares were illegally issued. Alley...

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