Arber v. Essex Wire Corporation

Decision Date08 January 1974
Docket NumberNo. 72-2121,72-2122.,72-2121
PartiesBertha ARBER and Ann Arber Broek, Plaintiffs-Appellants, Cross-Appellees, v. ESSEX WIRE CORPORATION and Walter F. Probst, Defendants-Appellees, Cross-Appellants.
CourtU.S. Court of Appeals — Sixth Circuit

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Robert W. Jones, Cleveland, Ohio, for appellants-cross-appellees; Edward I. Stillman, Cleveland, Ohio, on brief.

Fred H. Bartlit, Jr., Chicago, Ill., for appellees-cross-appellants; H. Stephen Madsen, Frank T. Black, Cleveland, Ohio, Samuel A. Haubold, Charles E. Baxter, Chicago, Ill., on brief.

Before McCREE and KENT,* Circuit Judges, and CECIL, Senior Circuit Judge.

McCREE, Circuit Judge.

This is an appeal from a judgment for defendants in an action brought by appellants, Bertha Arber and Ann Arber Broek, her daughter, for rescission of a sale in 1961 of 525 shares of Essex Wire Corporation common stock to Essex.1 The complaint, filed November 9, 1966, charged that Essex, the purchaser, and Walter F. Probst, the president of Essex at the time of sale and the principal negotiator on behalf of Essex, failed to disclose material facts relating to the stock's value in violation of state common law and of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b),2 and the Securities and Exchange Commission's Rule 10b-5,3 promulgated thereunder. The district court held that the evidence at trial did not establish any violation of state law or of the federal securities law and, alternatively, that appellants' claims for rescission were barred by laches. Appellants appeal from an order of July 26, 1972, denying them a trial by jury and from the findings of fact and conclusions of law filed with the district court's decision on August 23, 1972. We affirm.

Herman Arber, a long-time employee of Essex and a plant manager for Essex until his death in 1948, the deceased husband of Bertha Arber and the father of Ann Arber Broek, originally purchased all 525 shares of stock that were transferred to Essex in the 1961 sale. In his will, Herman Arber bequeathed a life interest in 500 shares to Bertha Arber, with the remainder interest to Ann Arber (Broek), and 25 shares to Bertha Arber outright. In 1951, during a conversation with an attorney representing the Arbers in a transfer of their stock interests to a trust, Probst first inquired whether they might be interested in selling their stock to Essex for $100 per share. Subsequently, the attorney, on behalf of the Arbers, declined Essex' offer, and told Probst that Bertha Arber had a high regard for the management of Essex and believed the investment in the corporation was sound.

In 1959, Probst telephoned the Arbers and indicated that he had heard that they were interested in selling their Essex stock. The Arbers responded that they had not considered selling, but would discuss the matter with Probst. A meeting was held during which Probst informed the Arbers that Essex was doing well, showed them financial statements, and again, on behalf of Essex, offered to purchase their stock, this time for $250 per share. The Arbers responded that they wanted to consult family members and would contact Probst if any interest in selling developed. At some time after this, Ralph Arber, the brother of Ann Arber Broek and a competent businessman who had worked for Essex at one time and later started his own business in competition with Essex, strongly advised Bertha Arber not to sell the Essex stock.4

Nevertheless, in early 1961 Ann Arber Broek contacted Probst and inquired whether Essex remained interested in purchasing its stock held by the Arbers. After this, a meeting was held between Probst and Broek, at which time Probst commented that Essex was continuing to do well and that the Arbers were fortunate in waiting because the price then being offered by Essex had risen from $250 per share to $350 per share. Broek replied that she wished to discuss the matter with other members of the family. Shortly thereafter, Broek telephoned Probst and informed him that after family discussion they had decided to accept Essex' offer of $350 per share, or $187,350. Some time late in 1961 the transaction was completed.

In January 1965, Broek learned from a prospectus that Essex shares were being offered to the public at a price, after adjustment for a stock split, equivalent to more than $2,000 per share transferred in 1961. She testified, ". . . we didn't do anything at first. My husband and I thought there was nothing that could be done." After some months had gone by they talked to an attorney who was an old family friend and later commenced this action on November 9, 1966 with the filing of the complaint against Probst and Essex. During the period of approximately 22 months between the Broeks' reading of the prospectus and the institution of this action, the value of the Essex stock appreciated by about sixty percent. The stock continued its meteoric rise and at the time of the trial in the district court, the price at which Essex was traded, according to appellants, was four times the price at which it had gone public in 1965.

Initially, after an evidentiary hearing in September 1970, the district court dismissed the federal claim on the grounds that the sale did not involve the use of the mails or other instrumentalities of interstate commerce. During trial, however, appellants offered newly discovered evidence on the jurisdictional issue, and the court, taking appellants' motion under advisement, permitted evidence to be presented on the federal as well as on the state law claim.

On this appeal the following issues are presented: (1) whether the evidence presented at trial established a violation of Section 10(b) in connection with the sale transaction; (2) whether the evidence presented at trial established that the conduct of the defendants constituted common law fraud; (3) whether appellants were denied their right to trial by jury guaranteed by the Seventh Amendment to the Constitution of the United States; and (4) whether the evidence supported the district court's conclusion that appellants' claims for rescission were barred by laches.

After a review of the entire record, we conclude that the findings of fact of the trial judge are not clearly erroneous, Fed.R.Civ.P. 52(a), and we set forth below the findings that are critical to the resolution of the issues presented on appeal.

We consider, first, appellants' claim under the federal securities law. The district court held that all allegedly undisclosed facts were either available to appellants or were not material. In addition, the court held that under federal as well as state law appellants must establish that if they had possessed the facts alleged to have been concealed, they would not have sold the stock; and the court found as a fact that appellants would not have relied on the facts they claim were undisclosed. On appeal, appellants urge that the court applied too restrictive a doctrine in determining materiality, and that proof of reliance is not required for a 10b-5 violation under federal law.

At the outset, we observe that underlying this provision of federal securities law is the Congressional judgment that full disclosure will help to ensure fair dealing in insider transactions. It is settled that Section 10(b) proscribes nondisclosure, as well as affirmative misrepresentation, of "material facts" affecting a stock's value. Securities and Exchange Commission v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968). This prohibition applies not only to an officer buying for his own account but also to a closely-held corporation, such as Essex in 1961, dealing in its own securities. Kohler v. Kohler Co., 208 F.Supp. 808, 820 (E.D.Wis.1962), aff'd, 319 F.2d 634, 638 (7th Cir. 1963); Northern Trust Co. v. Essaness Theatres Corp., 103 F.Supp. 954 (N.D.Ill. 1952).

The district court held that the requisite "materiality" could be demonstrated only by a showing of nondisclosure of "special facts" such as mergers or sale of assets, not ascertainable from the books, which "greatly appreciate" stock value. We think this test is overly restrictive of the Congressional purpose and contrary to the general interpretation of Section 10(b) in the federal courts. Whether undisclosed facts are "material" does not depend upon whether they concern specific transactions. Nor is it necessary that the facts be of such a nature that they "greatly appreciate" the stock's value. We adhere to the test stated by the Second Circuit Court of Appeals in the landmark Texas Gulf Sulphur decision: whether a reasonable man would have attached importance to the undisclosed facts in determining his choice of action in the particular transaction in question. 401 F.2d at 849. See also Northwest Paper Corp. v. Thompson, 421 F.2d 137, 138 (9th Cir. 1970); Securities and Exchange Commission v. Great American Industries, Inc., 407 F.2d 453, 459-460 (2d Cir. 1968), cert. denied, 395 U.S. 920, 89 S.Ct. 1770, 23 L.Ed.2d 237 (1969); List v. Fashion Park, Inc., 340 F.2d 457, 461-463 (2d Cir. 1965), cert. denied, 382 U.S. 811, 86 S.Ct. 23, 15 L.Ed.2d 60 (1966).

To apply this standard, it is necessary to identify what facts, if any, were not disclosed by defendants to the Arbers before Essex' purchase of the Arbers' shares of stock and to assess the significance, from a reasonable person's viewpoint in the context of the 1961 sale, of any nondisclosures. Appellants contend that defendants did not disclose the following facts: (1) the role of Essex management in controlling an "administered price;" (2) the personal interest of Probst and Essex management in the transaction; (3) the book value of the stock, which appellants allege, was more than double the amount offered; and (4) other material facts concerning the earnings and corporate activity and plans of Essex.

The crux of the first contention is that before Essex "went public"...

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