Brennan v. Midwestern United Life Insurance Company

• Decision Date: 05 November 1969
• Docket Number: No. 17167.,17167.
• Parties: Tora C. BRENNAN, Plaintiff-Appellee, v. MIDWESTERN UNITED LIFE INSURANCE COMPANY, a corporation, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

417 F.2d 147 (1969)

Tora C. BRENNAN, Plaintiff-Appellee, v. MIDWESTERN UNITED LIFE INSURANCE COMPANY, a corporation, Defendant-Appellant.

No. 17167.

United States Court of Appeals Seventh Circuit.

September 29, 1969.

Rehearing Denied November 5, 1969.

Albert E. Jenner, Jr., John C. Tucker, David C. Roston, Chicago, Ill., G. R. Redding, John L. Woolling, Indianapolis, Ind., Gilmore S. Haynie, Fort Wayne, Ind., for defendant-appellant.

Charles B. Feibleman, Sidney Mishkin, Indianapolis, Ind., for plaintiff-appellee; Bamberger & Feibleman, Indianapolis, Ind., Robert L. Kaag, Fort Wayne, Ind., of counsel.

Before SWYGERT and CUMMINGS, Circuit Judges, and MORGAN, District Judge.¹

Rehearing En Banc Denied November 5, 1969.

SWYGERT, Circuit Judge.

This is an appeal from a judgment granted the plaintiff in a class action against the defendant, Midwestern United Life Insurance Company, on behalf of all persons who bought Midwestern stock from Dobich Securities Corporation but failed to receive delivery of their stock.

Midwestern is an Indiana corporation with its principal place of busines in Fort Wayne, Indiana. During the period in question it had a million shares of stock outstanding and over 10,000 stockholders.

Dobich Securities Corporation was incorporated in Indiana in 1963. Michael Dobich owned most of the stock of the corporation and was its president, chief executive officer, and in control of its operations. Dobich Securities' operations were entirely intrastate and under the regulations of the Indiana Securities Commission.

The district court held that Dobich Securities and Michael Dobich violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities Exchange Commission in the sale of Midwestern stock and that Midwestern aided and abetted those violations by both affirmative conduct and silence and inaction after November 30, 1964. The court further held that Midwestern's conduct was a proximate cause of the loss sustained by those who purchased Midwestern stock from Dobich Securities on or after December 1, 1964 and did not receive delivery of their stock.

The principal issue before us is whether the record supports certain findings made by the trial judge, namely, that Midwestern's president, Phil J. Schwanz, and its general counsel, Ralph Sheets, knew prior to November 30, 1964 that "Dobich was dealing in a fraudulent manner with his customers' money," thus violating the securities laws; thereafter Midwestern intentionally aided and abetted Dobich in order to gain a benefit for itself; and there was a causal relation between Midwestern's conduct and the loss suffered by the plaintiff and the other purchasers of Midwestern's stock who were similarly situated. Two other issues were presented: whether Midwestern had a duty to report Dobich's activities to the Indiana Securities Commission, and whether Midwestern's affirmative conduct, as opposed to silence and inaction, was an issue raised either by the pleadings or tried with the consent of the parties.

With respect to the principal issue our duty is to decide whether the trial judge's findings were clearly erroneous. As stated by many other reviewing courts, we, as an appellate tribunal, may not retry the case or substitute our judgment for that of the trial judge. It is he, who after judging the credibility of the witnesses, weighing the evidence, and drawing inferences, makes factual determinations. Our function is to ascertain, after considering the record in its entirety, whether the inferences drawn by the trial judge have a sufficient evidentiary basis so that it can be said they are reasonable, that is, could have been arrived at by logical deduction. In performing that function, we may not resolve testimonial conflicts or attempt to judge the credibility of witnesses.

The knowledge, motive, design, and intent which underlay the actions of a number of people in this case had to be determined by the trial judge. Such determinations are seldom made on the basis of direct proof. More often they are arrived at by inference from indirect evidence and after the trier of fact has judged the credibility of the witnesses. The latter was the situation in the present case. Judge Eschbach was well aware of this as indicated by one of the concluding paragraphs in his memorandum opinion which accompanied the district court's decision holding Midwestern liable.² He wrote:

This long and detailed account of MULIC\'s activities as they related to Dobich Securities Corporation has been necessary because only from an assimilation of a large number of small incidents can ultimate conclusions about MULIC\'s knowledge and conduct be derived. The unusual facets of this case will be observed in the unique facts and surrounding circumstances which have been disclosed by the evidence and not in any unusual application of legal principles. It is for this reason that an unusually long and detailed statement of facts has been required. No one incident or witness has provided a complete picture of the relevant facts and circumstances. An accurate understanding of MULIC\'s knowledge and conduct can be derived only from a chain of factors disclosed by many witnesses, exhibits, and stipulations. This case clearly demonstrates that the limits of duties prescribed by the Securities Exchange Act of 1934 `* * * cannot be confined to an abstract rule but must be fashioned case by case as particular facts dictate.\' Kohler v. Kohler Co., 319 F.2d 634, at 637-638, 7 A.L. R.3d 486 (7th Cir.1963).

We cannot agree with Midwestern's argument that the vast majority of the evidence is undisputed and therefore we are free to draw our own inferences regardless of those drawn by the trial judge. Although much of the evidence is either documentary or relates to undisputed events, the import of this evidence was passed upon by the judge in the light of the testimony of witnesses, both interested and disinterested. Accordingly, credibility determinations were a significant part of the inferences which he drew from the primary facts and testimony. To be expected, Midwestern's defense was to deny any wrongdoing; however, it is evident that the trial court judged the defendant's actions in the light of all the evidence, testimonial and documentary, rather than accepting at face value the self-serving testimony of certain witnesses.

With the foregoing approach in mind, we have considered the record as well as the contentions and arguments advanced by the parties. Although many of the arguments made by Midwestern to demonstrate that the evidence supports findings other than those made by the trial judge are persuasive, the counterarguments made by the plaintiff in favor of the district court's finding are equally so. This is a close case, but our ultimate conclusion is that, on balance, we cannot say that the factual determinations made by the district judge are clearly erroneous.

We believe it would not only unduly lengthen this opinion but would serve no useful purpose to recite in detail the evidentiary background of this case. That background is contained in Judge Eschbach's exhaustive memorandum decision to which we have referred. Rather we shall point out the more important reasons why we think there is sufficient evidentiary support for findings which Midwestern says are erroneous.

I. Midwestern's knowledge that Dobich was violating the Securities laws

The district judge found that "Schwanz and Sheets knew well before November 30, 1964 that Dobich was dealing in a fraudulent manner with his customers' money." We believe that a number of events and circumstances (many of them alluded to in the district judge's opinion) when considered in combination support this finding.

Schwanz and Sheets knew by reason of the Dellwo incident³ in May 1964 that Dobich was selling Midwestern stock to his customers and that through one of his salesmen, he had made a number of misrepresentations. In September 1964 they became aware through four complaints from customers of Dobich that his delivery of Midwestern stock was abnormally delayed. As a result, they discussed the possibility that Dobich was using his customers' money as working capital. After September 28 Sheets wrote Dobich that "It appears that you are using your clients' money as working capital, which should not be done." Sheets also expressed concern that Dobich's customers might feel Midwestern was responsible if Dobich was "unable to make good on its obligations to transfer MULIC stock." Dobich responded to this letter by writing to Sheets, "We have developed a substantial interest in your company." He asked for a meeting with Schwanz and Sheets. The meeting occurred on October 12, 1964. Prior to that another Dobich customer complained to Midwestern that he had purchased $7,500 worth of its stock in July and had not yet received a stock certificate. At the meeting Dobich told Schwanz and Sheets that he had stock to deliver, but that his late delivery of Midwestern stock to his customers was caused by the difficulty he was experiencing in getting the stock released from collateral and from other brokers from whom he had purchased Midwestern stock. No attempt was made by Schwanz to verify this explanation although Sheets on the witness stand inferentially admitted the unlikelihood of the story about difficulty with releases of collateral. Schwanz' testimony revealed his awareness of Dobich's late deliveries:

I can tell you about what he Dobich said. "As you know we\'re selling a lot of your stock." And I said, "Well, you probably are, but I still want fast deliveries. I want deliveries to be normal. I do not want them to be slow." * * * "I don\'t care what you are selling, its got to be done right or not at all."

In recalling the meeting with Dobich on October 12, Schwanz testified with respect to giving Dobich a two-week deadline period, Dobich had said, "In two weeks time I can be even with the...