Northland Capital Corp. v. Silver

• Decision Date: 25 May 1984
• Docket Number: No. 83-1449,83-1449
• Citation: 236 U.S.App. D.C. 390,735 F.2d 1421
• Parties: , Fed. Sec. L. Rep. P 91,496 NORTHLAND CAPITAL CORPORATION, Appellant, v. A. David SILVER and A. David Silver & Co., et al.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 1421

735 F.2d 1421

236 U.S.App.D.C. 390, Fed. Sec. L. Rep. P 91,496

NORTHLAND CAPITAL CORPORATION, Appellant, v. A. David SILVER and A. David Silver & Co., et al.

No. 83-1449.

United States Court of Appeals, District of Columbia Circuit.

Argued Feb. 3, 1984.

Decided May 25, 1984.

Appeal from the United States District Court for the District of Columbia (Civil Action No. 81-00549).

Harris S. Ammerman, Washington, D.C., for appellant.

Edward M. Waibel, pro se, for appellee.

Before WALD, BORK and STARR, Circuit Judges.

Opinion for the Court filed by Circuit Judge STARR.

Dissenting opinion filed by Circuit Judge WALD.

STARR, Circuit Judge:

This case presents a recurring issue, albeit in a unique factual setting, under the federal securities laws. The question before us is whether the transaction at issue here constituted a "purchase" or "sale" of securities under section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Northland Capital Corporation ("Northland") brought this action under the 1934 Securities Exchange Act, 15 U.S.C. Secs. 78a-78kk (1982), ("the '34 Act") and under the common law of fraud against A. David Silver, A. David Silver & Co., and various inside and outside directors of Watkins Corporation ("Watkins") to recover $50,000 remitted by Northland to Watkins via a wire transfer. Northland claimed that it had standing to bring a private cause of action under Rule 10b-5, promulgated under section 10(b) of the '34 Act, 15 U.S.C. Sec. 78j(b).

On motion for summary judgment, the District Court concluded that Northland was not a purchaser of securities, inasmuch as Northland and Watkins never came to a meeting of the minds with respect to the purchase of the securities in question. The court therefore concluded that, under the case of Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975), requiring a plaintiff to be an actual purchaser to satisfy Rule 10b-5's requirement that the fraud be "in connection with the purchase or sale of any securities," Northland had no standing to bring a private cause of action under the '34 Act. The court dismissed the remaining common-law claim, which was based solely upon the court's pendent jurisdiction. Northland appealed the District Court's judgment. For the reasons stated below, we affirm.

I

Successful closings of financial deals are fundamentally all alike; every unsuccessful closing is unsuccessful in its own way. The events that led to the unsuccessful closing here and precipitated this lawsuit began in the fall of 1978 when Watkins Corporation undertook a search for additional capital. Watkins, a District of Columbia corporation with its principal corporate offices in Northern Virginia, was engaged in the business of operating franchise outlets for the International House of Pancakes on the eastern seaboard. At its height, Watkins operated thirty such restaurants. The founder, chief executive officer, and major stockholder was Philander Claxton, III. Of relevance to the matter before us, Mr. Claxton's principal duties included responsibility for the financial matters of the enterprise. Defendant Edward Waibel, the president of Watkins, was principally responsible for operations. There was no chief financial officer.

In 1978, Mr. Claxton on behalf of Watkins engaged A. David Silver of A. David Silver & Co., a New York venture capital concern, to raise one million dollars of additional capital for Watkins. This target was to be reached through a private placement with a consortium of small business investment companies (SBIC's). Mr. Silver prepared a memorandum describing the proposed investment and detailing Watkins' operations and financial condition. His description of Watkins was based on a 1977 audit report and a 1978 opinion letter purportedly prepared by Price, Waterhouse & Co., both of which are now acknowledged to be forgeries. Mr. Silver sent the memorandum to a variety of SBIC's, including Allied Capital Corporation ("Allied"), based in Washington, D.C., and plaintiff Northland Capital Corporation, based in Duluth, Minnesota. Plaintiff's Opposition to Defendant's Statement of Material Facts p 26 ("Plaintiff's Statement").

Allied acted as the syndicator of the Watkins financing, persuading six other SBIC's to participate in the transaction. Allied was also a major participant, reserving $250,000 of the investment for itself. Plaintiff's Statement p 29. Northland, on the other hand, was located far from the center of the action which was about to transpire. Capitalized at $350,000, Northland had at the time of this transaction only two employees, Mr. Barnum, who was its President, and Mrs. Dunphy, who was Mr. Barnum's secretary and who enjoyed the title of Assistant Secretary. Because of its small capitalization, Northland limited its participation in the Watkins financing to $50,000. Transcript of Deposition of George Barnum at 56 ("Barnum Deposition").

Like other SBIC's, Northland's sole business is to invest in small business. It is a veteran in the field, having participated in 30 to 40 investments since its incorporation in 1967. Barnum Deposition at 8. Northland, however, generally relies upon other SBIC's to close its portion of the transaction because Northland is usually a minor participant in any given financing and because, in Mr. Barnum's words, Duluth is not "the venture capital center of the world." Id. at 10. This financing was no exception to the rule. Mr. Barnum authorized Allied, which he characterized as "the lead investor," to act on Northland's behalf at the contemplated closing. Id. at 16, 101. He further stated that Northland "rode on [Allied's] coattails as far as setting the terms of the investment." Id. at 16.

After consulting with the other participating SBIC's Allied set forth the terms of the proposed investment in a letter dated January 26, 1979. For purposes of this case, the most important requirements imposed by the SBIC's upon Watkins were as follows: (1) that all amounts received from the investors would be used to construct new franchise locations; (2) that the total amount of the financing would be placed in a separate "development account" from which it could not be withdrawn except for use in the construction of franchise locations; and (3) that after the construction of a building, the realty and improvements would, under a sale-leaseback arrangement, be sold to other investors and leased back to Watkins. ¹ In return for their infusion of funds, the SBIC's were to receive not only interest but also stock warrants to be delivered at the time of the closing. Letter of David Gladstone of Allied Capital, to Mr. Claxton, Watkins Corp. (Jan. 26, 1979), Gladstone Deposition Exhibit 5.

With the transaction so structured, the closing was scheduled for March 9, 1979, a fact known to Mr. Barnum. He elected not to attend, however, having deserted Duluth for the sunnier climes of a West Indies island with no telephone service. Barnum Deposition at 37. Mrs. Dunphy, his secretary, testified that she was instructed by Mr. Barnum to dispatch the $50,000 Northland investment in accordance with Allied's instructions. Deposition of Elizabeth Dunphy at 8 ("Dunphy Deposition").

The ensuing events are of pivotal importance as to the nature of the Northland-Watkins transaction. By March 8, Mrs. Dunphy had received no instructions from Allied. As she herself was leaving for vacation the following day, she telephoned Allied's offices in Washington. However, according to Mrs. Dunphy's deposition testimony, she was unable to speak with an officer of Allied, and an Allied secretary suggested that she call Mr. Silver. She did so, but, according to Mrs. Dunphy, Mr. Silver unhelpfully replied that he was busy, that he did not know the date of the closing, and that she should call Mr. Claxton. In response to her ensuing call, Mr. Claxton told Mrs. Dunphy to wire the funds to the Union First National Bank of Washington in care of one Mr. Cherouny, a senior vice president of Union First. She wired the money, "assumed" that it would be held in escrow until the closing, and departed on vacation. Dunphy Deposition at 9-12. Fatefully, however, the funds were transferred by the bank to Watkins' general corporate account. This telephone conversation constituted the whole of Northland's communications with Watkins prior to the scheduled closing.

The next day, March 9, 1979, Mr. Gladstone, an officer of Allied, and Mr. Claxton met in an attempt to close the transaction. The meeting was unsuccessful because, among other things, Mr. Gladstone was concerned that Watkins' Board of Directors had not approved the transaction and that an opinion letter purportedly prepared by Watkins' counsel bore tell-tale marks of a forgery. A week later, Mr. Gladstone sent a letter which identified twenty-two items necessary "in order to close this loan." Soon thereafter, on March 21, 1979, negotiations foundered. On April 6, 1979, Mr. Silver sent a letter to the representatives of the participating SBIC's, officially informing them that the deal had been called off. The letter stated: "[A]ll of you have been to closings that didn't close. That's what happened with Watkins Corp...." Memorandum of A. David Silver, A. David Silver & Co., to David Gladstone, Gladstone Deposition Exhibit 10. The financing, in fact, was never closed.

At the unsuccessful March 9 meeting, Mr. Claxton nonetheless executed a number of documents. Among those documents was an agreement letter from Watkins to Allied, setting forth Watkins' version of the contemplated transaction. The Watkins' version states, contrary to Allied's proposal of January 26, 1979, that Watkins would use 50 percent of the net proceeds from the financing for working capital and 50 percent to acquire additional sites to operate as restaurants. Letter of Mr. Claxton, Watkins Corp., to Allied Investment Corp., Paragraph I(A)(8)....