Allen v. Schauf

Decision Date25 January 1969
Docket NumberNo. 45185,45185
Citation202 Kan. 348,449 P.2d 1010
Parties, Blue Sky L. Rep. P 70,803 Thomas ALLEN and Frances Allen, Appellants, v. Lucille M. SCHAUF, Richard E. Schauf, Investment Systems, Inc., a Kansas corporation, Construction Systems, Inc., a Kansas corporation, Kan-Fran, Inc., a Kansas corporation, and Development Systems, Inc., a Kansas corporation, Appellees.
CourtKansas Supreme Court

Syllabus by the Court

The record in an action by the plaintiff-purchasers of securities of a domestic corporation to recover the consideration paid on the grounds that the defendants offered and sold unregistered securities in violation of K.S.A. 17-1255, and induced the plaintiffs to purchase the same by means of untrue statements of material facts and omissions to state material facts in violation of K.S.A. 17-1268, is examined, and it is held: The sale of the corporate stock by the defendants was an isolated transaction under K.S.A. 17-1262(a) and (h) and Regulation 81-1-1 adopted and published by the Securities Commission pursuant to K.S.A. 17-1270(f), and filed with the Revisor, of Statutes in accordance with 1968 Supplement to K.S.A. 77-415 et seq. It is further held there was substantial evidence to support the district court's finding of fact of the plaintiffs' failure to sustain the burden of proof that the defendants offered or sold the securities by means of untrue statements of material facts of omissions to state material facts necessary in order to make the statements made in the light of the circumstances under which they were made, not misleading, and that no prejudicial error affecting the substantial rights of the plaintiffs was affirmatively shown to exist by the district court's rulings excluding certain evidence and exhibits offered by the plaintiffs at the trial.

James W. Sargent, Wichita, argued the cause, and Bruce W. Zuercher, Wichita, was with him on the brief for appellants.

Thomas A. Wood, Wichita, argued the cause, and Paul V. Smith, Douglas E. Shay, William C. Farmer, Leo R. Wetta, James R. Schaefer, and Larry L. Witherspoon, Wichita, were with him on the brief for appellees.

FATZER, Justice.

This appeal arises out of a controversy over the application and alleged violations of the Kansas Securities Act. (K.S.A. 17-1252 et seq.) The trial was to the district court which made findings and conclusions, and entered judgment in favor of the defendant-appellees. The plaintiff-appellants timely perfected this appeal.

The principal events giving rise to this lawsuit occurred in February and March 1966, and involved the plaintiffs, Thomas Allen and Frances Allen, his wife, and the defendants, Richard E. Schauf and Lucille M. Schauf, his wife. Also involved were Mr. and Mrs. George M. Gillen, of Phoenix, Arizona, who formerly lived in Wichita. The Gillens were not parties to the action, but Mr. Gillen testified as a witness for the plaintiffs. The plaintiff, Thomas Allen, married Frances Loop on March 16, 1966, and all reference to Frances Loop prior to that date is made as Frances Allen.

The transactions in question mainly involved the three families who had been friends for some years-a plan to engage in the corporate building and selling of real estate projects through the use of a new building construction method which the Schaufs had been active in expanding, and the sole right to the use of which Lucille Schauf had recently acquired. It was known the Gillens would participate financially in part, and if the Allens did not likewise participate in part, the Gillens would assume full financial participation.

Prior to February 1966, Thomas Allen and Richard Schauf had worked together for several years as tool makers in the same department at Cessna, and Frances Allen had been acquainted with Lucille and Richard Schauf for four or five years. Thomas Allen had also worked with a Mr. Meehan at Cessna, the inventor of a unique patented construction method known as Mee-Strong. Allen had been acquainted with the process for quite some time and considered it an excellent construction method which could save builders money as well as make money for those who used it. Since their first acquaintance, Frances Allen knew that Lucille Schauf had some type of connection with this construction method and knew the Schaufs were interested in building projects of the type involved in this action.

Prior to dates here material, and on or about October 27, 1965, the defendants Lucille and Richard Schauf, and one R. W. Willey incorporated and were the owners of Development Systems, Inc., which was formed to provide consultant and sponsorship services for the development of real estate projects from conception to completion. The corporate office was in Wichita; Willey was president, Richard Schauf was vice president, and Lucille Schauf was secretary-treasurer. The defendants and Willey had been working with a building construction project in Wellington, Kansas, which was to be financed through the Federal Housing Administration. Their involvement was through Development Systems, and the Wellington project was controlled by one Charles E. Barnett who held the land options for the project and who was dealing with F.H.A. as the sponsor.

On February 21, 1966, the defendants executed, along with R. W. Willey, agreements to incorporate the three corporations here involved, to be known as Kan-Fran, Inc., Investment Systems, Inc., and Construction Systems, Inc., for the purpose of developing the Mee-Strong construction method. The agreements provided, among other things, that the capital stock of each corporation would consist of 1,000 shares of common stock with par value of $100. The agreements further provided that each of the parties had rendered valuable services in connection with the promotion and organization of the business to be incorporated and it was mutually agreed they would receive as compensation for their services the following common stock at part value in each corporation: Kan-Fran, Lucille Schauf 190 shares, Richard Schauf and Willey 180 shares each; Investment Systems, Lucille Schauf 265 shares, Richard Schauf and Willey 255 shares each; Construction Systems, Lucille Schauf 265 shares, Richard Schauf and Willey 255 shares each.

With respect to Kan-Fran, the agreement provided that an option for 225 shares of common stock at par value of $100 per share be granted to the parties as follows: Lucille and Richard Schauf 75 shares each, and Willey 75 shares, the option to be exercised in whole or in part within ten years from February 21, 1966. The Kan-Fran agreement further provided that 200 shares of common stock would be sold to two other parties at par value of $100 per share, with the understanding that Lucille Schauf would receive $7,500 for the following: $500 incorporation expenses, $1,000 capitalization fee, and $6,000 for assignment to Kan-Fran of the sole right to use the Mee-Strong construction method in Kansas.

Following the execution of the agreements to incorporate the three corporations, and on February 21, 1966, a meeting of the incorporators was convened to elect the board of directors of each corporation. R. W. Willey was elected president, Richard Schauf, vice president, and Lucille Schauf, Secretary-treasurer. At the meeting resolutions were adopted which generally placed into effect the provision of the agreements theretofore executed.

On the same day, February 21, 1966, Lucille Schauf telephoned Frances Allen at her work at Boeing and advised her she had acquired the sole right to the use of the Mee-Strong construction method and was anticipating the formation of some corporations to develop the method and follow it through; that additional capital was needed to make it go faster, and she knew of Mrs. Allen's interest; that if Mrs. Allen was interested, to come visit about it.

On February 23, 1966, Mr. and Mrs. Allen went to the home of Mr. and Mrs. Schauf in Garden Plain, Kansas. At that meeting, the Allens agreed with the Schaufs to invest $10,000 in the venture. Mrs. Allen felt the use of the Mee-Strong construction method would have a great impact on the construction industry and would be the type of thing that could realize some return on her investment. That was the only reason she was interested in investing her money. The record shows that at the February 23, meeting, the Allens were advised of the basic ideas and planned operations of the three corporations. They were told that Lucille Schauf would assign her rights to the use of the Mee-Strong construction method to Kan-Fran for $6,000; that Kan-Fran would be the 'mother corporation' and would completely control Investment Systems and Construction Systems, which were associated or subsidiary companies with specific functions, but that all dividends would be paid from Kan-Fran, and that if par value was paid for the shares of stock in Kan-Fran, no money was to be paid for the shares of stock in the other two corporations. The Allens were told there was a need for $20,000 actual cash investment: that the Gillens would invest $10,000, and if the Allens did not desire to invest, the Gillens would invest the $20,000, which would be the only paid-in working capital of the corporations. The Allens were also told that if they did invest, they would receive ten percent of the corporate stock for which they would pay $10,000, which was to be used only in the three corporations, and no money would be transferred to Development Systems. The Allens were further told that Lucille and Richard Schauf would each receive promotional common stock in each corporation for services rendered, and specifically they would receive 190 and 180 shares respectively, of common stock in Kan-Fran. They were also told Willey would receive promotional stock in each corporation and would receive 180 shares of common stock in Kan-Fran.

The record further indicates the Allens were advised the Schaufs and Willey had a stock option...

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8 cases
  • Northern Natural Gas Co. v. Williams
    • United States
    • Kansas Supreme Court
    • January 11, 1972
    ...of the evidence introduced below. The dangers apparent in such a practice have long been recognized by this court. (Allen v. Schauf, 202 Kan. 348, 449 P.2d 1010; White v. Hutton, 205 Kan. 715, 472 P.2d In view of the record presented and the findings of the district court, it is perhaps imp......
  • Comeau v. Rupp
    • United States
    • U.S. District Court — District of Kansas
    • October 29, 1992
    ...made in the light of the circumstances under which they are made not misleading...." K.S.A. § 17-1268(a). In Allen v. Schauf, 202 Kan. 348, 449 P.2d 1010 (1969), the court considered a plaintiff's challenge to the trial court's denial of recovery under K.S.A. § 17-1268(a). The court The fir......
  • Woods v. Homes & Structures of Pittsburg, Kansas
    • United States
    • U.S. District Court — District of Kansas
    • April 22, 1980
    ...ever been applied where the purchases occurred outside the state. State v. Hodge, 204 Kan. 98, 460 P.2d 596 (1969); Allen v. Schauf, 202 Kan. 348, 449 P.2d 1010 (1969) (plaintiffs were purchasers in Kansas, purchasers in Arizona were not parties to the action although they testified as witn......
  • State v. Stuber
    • United States
    • Kansas Court of Appeals
    • July 2, 1998
    ...99 L.Ed.2d 194 (1988); TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976); Allen v. Schauf, 202 Kan. 348, 449 P.2d 1010 (1969); State v. Puckett, 6 Kan.App.2d 688, 634 P.2d 144 (1981), aff'd 230 Kan. 596, 640 P.2d 1198 (1982). Despite this history, we......
  • Request a trial to view additional results
1 provisions
  • Act 110, SB 588 – Uniform Securities Act of 2005
    • United States
    • South Carolina Session Laws
    • January 1, 2005
    ...Inc. v. Goettsch, 403 N.W.2d 772 (Iowa 1987) (isolated nonissuer transaction exemption is not unconstitutionally vague); Allen v. Schauf, 449 P.2d 1010 (Kan. 1969) (regulation defined isolated transactions to not exceed four persons solicited in a twelve month period); Nelson v. State, 355 ......

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