Bening v. Muegler, 94-3933

Decision Date11 October 1995
Docket NumberNo. 94-3933,94-3933
Citation67 F.3d 691
PartiesDavid J. BENING; Alfred W. Harre, Appellants, v. Arthur G. MUEGLER, Appellee.
CourtU.S. Court of Appeals — Eighth Circuit

Thomas G. Berndsen, St. Louis, MO, argued, for appellant.

Arthur G. Muegler, Scottsdale, AZ, pro se.

Before HANSEN, HEANEY, and MURPHY, Circuit Judges.

DIANA E. MURPHY, Circuit Judge.

Appellants David J. Bening and Alfred W. Harre sued Concepts Communication Management Corporation (Concepts) and three of its attorneys, including Arthur G. Muegler, to recover funds they had invested. The case went to trial against Muegler only, and the jury returned a verdict in his favor. 1 Bening and Harre appeal from the adverse judgment, alleging that the district court erred in its instructions to the jury and in denying their post-trial motions. We reverse and remand for a new trial.

I.

Appellants, two Illinois farmers, invested a total of over $80,000 each in Concepts and a related limited partnership in 1988 and 1989. They allege that they made these investments in reliance on misrepresentations made by Muegler which directly caused the loss in value of their investments.

Concepts began as a fireworks wholesaler. It later branched out into cellular communications and paging systems and began holding small meetings for potential investors in 1988. Muegler, who was introduced as the former general counsel at Emerson Electric Company, spoke at many or all of these meetings and was attorney for Concepts during most of the relevant time period. According to evidence presented by appellants, Muegler repeatedly told potential investors that all funds invested in Concepts would be for the legitimate ongoing business purposes of the corporation. They also presented evidence that a prospectus prepared by Muegler for a meeting in September 1988 was misleading in that it indicated that Concepts had been restructured as a corporation and was in compliance with all applicable securities Illinois laws. 2 Concepts president James Grice, who was portrayed as a computer and communications expert, also frequently spoke at the meetings. In response to the sales talks by Muegler and Grice, Bening and Harre each invested roughly $20,000 in Concepts during calendar year 1988.

Appellants also presented evidence of another alleged misrepresentation by Muegler at a meeting in January 1989. This was that an anonymous individual from Illinois had invested in Concepts and that his investment was used to purchase equipment from Glenayre Electric. According to appellants, Muegler said Concepts, not the anonymous investor, would own the equipment. In fact, Concepts leased the equipment rather than purchasing it.

In February 1989, Concepts held another investor meeting, after which Muegler sold Bening and Harre on a new investment opportunity. For several months Concepts had been telling its investors that the secret investor from Illinois had political connections and could secure a large paging account from the state government in Springfield. Muegler now told Bening and Harre that the investor did not want to make the investment himself for political reasons and that the opportunity was available to appellants for $75,000 apiece. He also stated that their funds would be used to purchase the required equipment to service the pagers. Grice then said that this was such a great investment that he wanted part of it for himself. Eventually it was agreed that Bening and Harre would each contribute $60,000 and Grice would put in $30,000. 3

This investment was to be in a partnership distinct from Concepts. Concepts was to be the general partner, while Bening, Harre, and Grice were to be limited partners. The new partnership was to be called Concept-Tel (Concept Tele in some documents). Appellants made their $60,000 investments on March 11, 1989. The limited partnership agreement stated:

[Concepts], out of the $150,000.00 proceeds paid to it this date by the Limited Partners, shall design, install and deliver a "Turn Key" telephone answering and paging facility in Springfield, Illinois within the time and having the equipment and capacity set out on the attached Exhibit D. Title to said "Turn Key" facility shall be in Partnership.

Concept-Tel was never registered with the state of Illinois, however, and the required equipment was never installed. There is no evidence that the contract with the state ever existed, and Grice never contributed his $30,000.

Rather than forming the limited partnership, Muegler and Grice issued sixty shares of Concepts class C stock to Bening and Harre, which was selling for $1,000 per share at the time. Muegler and Grice then, without informing Bening and Harre, applied their $120,000 contributed to the Concept-Tel limited partnership as collateral for a bank loan to Concepts, not Concept-Tel. An amount almost equal to the loan was eventually spent by Concepts to construct a gay bar in St. Louis.

Less than a week after appellants made their investment, Muegler and Grice met with a commercial lending officer at Citizens National Bank to discuss the loan to Concepts. Although the loan could have been used to fulfill obligations Concepts had as general partner in Concept-Tel, the lending officer testified that Grice and Muegler told him that the collateral for the loan came from the sale of shares in Concepts to two individuals. Muegler and Grice never informed the bank about Concept-Tel or the nature of the investment of Bening and Harre in a limited partnership. The loan was unrestricted, and no explanation was presented as to why funds for use in the communications industry were eventually used to renovate a gay bar.

The bar project was begun in October 1988. Muegler was present at the first meeting between Grice and the lessor of the building, and the appellants presented evidence at trial which could support an inference that Muegler was aware that Grice was spending corporate funds on the nightclub.

In December 1989, the police raided Concepts' office in St. Louis and arrested Grice, who as a convicted felon was prohibited from selling securities. There was evidence that Muegler knew that Grice was an ex-convict and that he later acknowledged he should have told appellants about his past. Grice was eventually convicted in Illinois for theft, deceptive practices, and unlawful sales of securities for his role in the Concepts scheme. Muegler was also indicted in Illinois, but the case against him was dismissed after judgment was entered in his favor in this matter.

Muegler allegedly had told appellants that Concepts owned the vital telecommunications equipment it used, but Concepts had actually leased the equipment from a company controlled by Gary Fears, the secret Illinois investor. After the police raid Fears exercised his rights under the lease and took control of the telecommunications equipment. Fears then effectively took over the corporation's operations and ran its business under a different corporate form. The other investors in Concepts were apparently left with no recourse since Concepts itself was left without assets, although Muegler did urge Fears to take their interests into account.

Appellants claimed they were damaged by Muegler's tortious conduct in that they lost the total value of their investments. Their evidence tended to show that their interests in Concepts became worthless when it lost its assets and its business operation and that their investment in the Concept-Tel limited partnership was diverted for other purposes. In their complaint they also sought punitive damages, costs, and attorney's fees.

Bening and Harre alleged both fraudulent and negligent misrepresentation by Muegler in this diversity action. Four counts of securities fraud in the original complaint were replaced by four counts of failure to disclose in a later amended complaint, which were dismissed by the district court because it found Muegler had no fiduciary duty to disclose information to Bening and Harre. 4 Muegler moved to filed counterclaims for malicious prosecution and abuse of process, but the district court denied the motion because Muegler had exercised his fifth amendment privilege and refused to answer any questions during his deposition. 5

At the close of appellants' case in chief, Muegler moved for judgment as a matter of law, which was denied. Because Muegler had been late in submitting pretrial documents, the district court granted appellants' motion in limine to bar most of the sixty witnesses Muegler claimed he would call and much of his documentary evidence. The district court also granted the appellants' motion to prevent Muegler from testifying on his own behalf because he had exercised his fifth amendment privilege before trial. Muegler rested his case without presenting any of the evidence still available to him and moved again unsuccessfully for judgment as a matter of law. The case was presented to the jury which found for Muegler on all counts submitted.

II.

The main focus of this appeal is on certain jury instructions given by the district court. It is undisputed that Missouri law governs the substantive legal issues. Appellants submitted four verdict directors 6 which summarized the alleged misrepresentations by Muegler as follows:

a) As of September 1988, when the Private Offering Prospectus was published, Concepts Communication had been restructured and was then in compliance with all applicable securities registration laws,

b) All of the funds invested by Plaintiffs into Concepts Communications would be used exclusively for the legitimate ongoing business purposes of Concepts Communication,

c) A person from the State of Illinois had invested a substantial sum of money into Concepts Communication and such money was used to purchase the Glenayre paging and computer equipment and that equipment was owned by Concepts Communication,

d) The money invested for the partnership...

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