In re Bell & Beckwith
| Decision Date | 28 June 1988 |
| Docket Number | Related Case No. 83-0132.,Bankruptcy No. 85-0022 |
| Citation | 89 BR 632 |
| Court | U.S. Bankruptcy Court — Northern District of Ohio |
| Parties | In re BELL & BECKWITH, Debtor. Patrick A. McGRAW, Trustee, Plaintiff, v. LIBERTY AIRLINES, INC., et al, Defendants. |
Fuller & Henry, Toledo, Ohio, for plaintiff.
R. Michael Frank, Toledo, Ohio, for defendants.
Richard G. LaValley, Sylvania, Ohio, H. Buswell Roberts, Jr., J. Michael Vassar, Toledo, Ohio, for defendant Frahn.
This cause comes before the Court on Cross Motions for Summary Judgment. In a previous ruling, this Court denied the Defendants' Motion to Dismiss Or In The Alternative, For A Stay of Proceeding, holding that the matter presented was a noncore related proceeding and that abstention was not appropriate. After discovery, the Trustee and the Defendants both filed Motions for Summary Judgment, with supporting Memoranda. Both parties later filed Memoranda in Opposition to the other parties' Motion for Summary Judgment. Subsequently, both sides filed Reply Briefs on the issues presented. A Request for Admissions and Interrogatories to the Defendants was then filed by the Trustee, along with a Brief. The Defendants filed a Brief in Opposition. After reviewing the written arguments, this Court Ordered the Defendants to answer the Plaintiff's Request for Admissions and Interrogatories. The Court has reviewed the written arguments of counsel, the affidavits, depositions, and records submitted, as well as the entire record in this case. Based on that review, and for the following reasons, the Plaintiff's Motion for Summary Judgment should be denied, and the Defendants' Motion for Summary Judgment should be granted in part and denied in part.
The Plaintiff in this action is the Trustee for the liquidation of the Debtor in the underlying bankruptcy proceeding. Bell & Beckwith, the Debtor, was a stock brokerage located in Toledo, Ohio. The brokerage operated as a partnership and was managed by Edward P. Wolfram, Jr., (hereinafter "Mr. Wolfram"). Starting in approximately 1973, Mr. Wolfram began systematically diverting cash and securities held by the brokerage in customer margin accounts. At the time the fraud was discovered by a Securities & Exchange Commission examiner in February of 1983, Mr. Wolfram had stolen approximately Forty-six Million Dollars.
On February 16, 1983, subsequent to the commencement of this liquidation proceeding, the Trustee received from both Mr. Wolfram and his wife, Zula Wolfram, an assignment of all their assets, interests, rights, and property. Certain property was listed in the assignment agreement. The Liberty Airlines, Inc. stock which is the subject of this litigation was not listed. The Trustee asserts that the stock in Liberty Airlines, Inc. (hereinafter "Liberty Airlines") was assigned through the general assignment of all real and personal property owned by the Wolframs or any of the Wolfram entities.
The case presently before the Court arises from a public stock offering by Liberty Airlines. In a nutshell, the Trustee seeks rescission of the sale of Twenty-five Thousand (25,000) shares of Liberty Airlines stock bought by NEST, Inc., an entity owned by Zula Wolfram. The Trustee contends that the stock offering was made in violation of the Ohio Securities Act, which is also known as Ohio's "Blue Sky Law". The Ohio Securities Act regulates public stock offerings made within the State. In 1982 and 1983, Defendant Liberty Airlines, Inc. was involved in making an initial public offering of Four Hundred Thousand (400,000) shares of its common stock. The Trustee's Complaint asserts that John R. Ayling did certain wrongful acts during the public stock offering which should give the Trustee the right to demand the return of the One Hundred Twenty-five Thousand Dollar ($125,000.00) purchase price of the Liberty Airlines shares. The Trustee argues that he acquired this right to rescind the stock purchase through the "blanket" assignment of property made by Zula Wolfram. The Defendants in this action are the officers and directors of Liberty Airlines. The Defendants have moved for Summary Judgment against the Trustee based on several defenses which are detailed in the body of the Opinion.
The Trustee's Complaint arises out of the following set of facts. In anticipation of its public stock offerings, Liberty Airlines sought "registration by qualification" in Ohio under O.R.C. § 1707.09. The Ohio Division of Securities granted this application by way of a Division Order dated September 17, 1982. The Division Order required certain conditions precedent to be fulfilled. The pertinent part of the Order states:
IT IS ORDERED FURTHER, that the securities herein qualified be sold in accordance with the terms and conditions more fully set forth in the application, exhibits, and other documentation filed herein.
At the time of Liberty's stock offering, John R. Ayling was a director of Liberty Airlines and a registered stock broker employed by Bell & Beckwith. Bell & Beckwith was the underwriter for the Liberty Airlines stock offering. Mr. Ayling owned One Hundred Seventy Thousand (170,000) shares of Liberty Airlines stock. All of Mr. Ayling's shares had been purchased prior to the public offering, for a price substantially lower than the public offering price of Five Dollars ($5.00) a share.
The Trustee asserts that liability under the Ohio Securities Act arises from two different sources in this case. First, the Trustee contends that Mr. Ayling did not properly escrow his stock certificates. Instead of escrowing valid certificates, the Trustee maintains that Mr. Ayling escrowed stock certificates which had been cancelled. The Trustee also asserts that Mr. Ayling did not redeem his "cheap stock", as required.
The November 12, 1982 Prospectus for the Liberty Airlines stock offering states at page 19:
In conjunction with the public offering, the National Association of Security Dealers required that Ninety-five Thousand (95,000) shares of Mr. Ayling's stock be redeemed by Liberty Airlines. Apparently, the Ohio Division of Securities Order required that the entire balance of Mr. Ayling's stock be placed into escrow. An escrow agreement was made between Liberty Airlines and the Mid-American National Bank and Trust Company for the escrow of the shares of Defendants Robert F. Wigmore, Sr., John R. Ayling, Merle E. Pheasant, Jr., and Thomas J. Wyles.
The record indicates that Mr. Ayling deposited certain certificates representing shares in Liberty Airlines with the escrow agent. Mr. Ayling deposited certificate number 11 (representing 10 shares of Liberty Airlines stock), certificate number 13 (representing 5 shares), and certificate number 95 (representing 74,985 shares). However, the escrowed stock certificates are marked as cancelled on the stock records of Liberty Airlines. No cancellation stamp, or other notice, appeared on the certificates which had been escrowed. The Trustee argues that the shares of stock were not outside of Mr. Ayling's possession and control. The Trustee points to the October 4, 1983 Deposition of John Ayling, which indicates that Mr. Ayling knew he had shares of Liberty Airlines in his account at Bell & Beckwith, and that he retained access to them. There is no allegation or evidence that Mr. Ayling sold any of this Liberty Airlines stock.
In early January of 1983, during the time when the Trustee contends that cancelled certificates were in escrow, NEST, Inc. purchased Twenty-five Thousand (25,000) shares of Liberty Airlines stock. NEST, Inc. was the name of an account at Bell & Beckwith which was held in Mrs. Wolfram's name. Mr. Wolfram had, for many years, handled his wife's investments, often without her knowledge of the particulars of her interest. Mr. Wolfram apparently sold the shares of Liberty Airlines stock to NEST, Inc. As previously noted, Mrs. Wolfram assigned all her rights, title and interest in all her property to the Trustee of the estate of Bell & Beckwith.
On January 28, 1983, investors were advised of their right to rescind their purchase of Liberty Airlines shares. The offer of rescission was not made because of knowledge of a violation of the Ohio Securities Act. Moreover, the offer to rescind was made prior to closing of the offer. It was an offer to rescind a commitment to purchase. There has been no offer by Liberty Airlines to the Plaintiff-Trustee to rescind the sale of Liberty Airlines shares pursuant to the provisions of the Ohio Securities Act.
The shares of Liberty Airlines were never issued after the closing of the offer on February 1, 1983. Accordingly, the Trustee has been unable to tender the shares back to the Defendants as required by O.R.C. § 1707.43.
On or about April 30, 1983, Attorney Frank J.P. McManus filed a claim form for Mrs. Wolfram with the Trustee. The claim form reflects that Mrs. Wolfram was the owner of the NEST, Inc. account, and that the account was assigned to the Trustee.
Defendant, Robert F. Wigmore, Sr., failed to file an Answer, and the Trustee's Motion for Default Judgment was granted by this Court on March 11, 1986.
Summary Judgment is properly granted when ...
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