Chaney v. Western States Title Insurance Company

• Decision Date: 03 October 1968
• Docket Number: No. C 17-67.,C 17-67.
• Parties: John Walter CHANEY, Plaintiff, v. WESTERN STATES TITLE INSURANCE COMPANY and Robert Anderson, Defendants.
• Court: U.S. District Court — District of Utah

292 F. Supp. 376

John Walter CHANEY, Plaintiff, v. WESTERN STATES TITLE INSURANCE COMPANY and Robert Anderson, Defendants.

No. C 17-67.

United States District Court D. Utah, Central Division.

October 3, 1968.

Gerald R. Miller, and Frederick S. Prince, Salt Lake City, Utah, for plaintiff.

Richard H. Nebeker, Salt Lake City, Utah, for defendant Western States Title Ins. Co.

Robert Anderson, Seattle, Wash., pro se.

MEMORANDUM DECISION CONCERNING DAMAGES AND ATTORNEY'S FEES

CHRISTENSEN, District Judge.

The jury's verdict and my formal findings and conclusions sufficiently indicate the bases of liability and damages on all points except a conflict of laws problem affecting the measure of damages, and questions of attorney's fees and interest.

It is sufficient to note as background for these points that the plaintiff entered into a transaction involving an exchange by plaintiff of real property in California for two promissory notes, and an assignment of uniform real estate contract on Utah property from one Ogle and his associate; that the transaction was one of numerous similar transactions in which Ogle, et al were involved; that the transfer of the uniform real estate contract by them constituted the sale of a security within the meaning of Section 3(a) (10) of the Securities Exchange Act of 1934;¹ that the plaintiff was induced to buy said security by fraudulent representations of the defendant Anderson, who acted with the apparent authority of the corporate defendant; that jurisdiction exists under the Securities Exchange Act,² and that pendant common law and Utah Uniform Securities Act³ claims were also tried. Plaintiff is a citizen of California, defendant Anderson a citizen of Utah, and the defendant Western States Title is a Utah corporation having its principal place of business in Salt Lake City, Utah.

The plaintiff was successful before a jury in establishing false representation within the contemplation of § 10(b) of the Securities Exchange Act⁴ and Rule 10(b)-5⁵ promulgated thereunder, and on the common law claim for fraud, but could not establish violation of the state act⁶ because the sale in question occurred outside Utah, although the fraudulent representation originated therein.⁷ The submission of the case to the jury through special interrogatories left for determination by the court the questions of damages, attorney's fees and interest.⁸

It must be decided whether the Benefit of the Bargain Rule or the Out-of-Pocket Rule applies in determining the amount of damages. It is clear that on plaintiff's claim under the Securities Exchange Act the Out-of-Pocket Rule generally followed by the federal courts should apply.⁹ It is arguable at least theoretically that the Utah Benefit of the Bargain Rule¹⁰ should apply to plaintiff's common law fraud claim, in which event the limitations of the federal rule would be rendered inoperative.

I have concluded that the Benefit of the Bargain Rule really has no application either in justice or in fact in view of the plaintiff's inflated valuation of the California property which he exchanged for the security. This is not to disparage the jury's finding that defendant Anderson, and through him the corporate defendant, deliberately defrauded the plaintiff contrary to both the common law and the federal securities statutes. But it is also manifest that plaintiff engaged in his own overreaching. The preponderance of the evidence, as well as the jury verdict, indicates that the plaintiff greatly exaggerated the value of the California property by impliedly representing that it was worth $156,000 when in reality it was worth only $40,000. That plaintiff did not expressly represent this inflated value does not alter the incongruity of recognizing such a misrepresentation by applying the Benefit of the Bargain Rule to give plaintiff a windfall of approximately $100,000 more than he fairly bargained for.¹¹

A federal court must, of course, follow the conflicts of law rule of the state in which it is sitting.¹² The Utah Supreme Court has not spoken on the issue in this particular context; I must therefore determine what the Utah law would be in this situation.

I do not think that application of the Out-of-Pocket Loss Rule is inconsistent with the proper conflict of laws rule, although I concede that Utah would ordinarily apply the Benefit of the Bargain Rule to the common law fraud count.¹³ In making a conflicts of laws decision in this case the Utah court could consider not only the contacts of the transaction with various jurisdictions, but the respective governmental interests and public policies of those jurisdictions. In addition, the Utah court could be faced with a peripheral violation of the Utah Uniform Securities Act and not with common law fraud alone. The transaction had significant contacts with the State of California: While Anderson was a resident of Utah, the misrepresentations were made to the plaintiff over the telephone while Anderson was in Utah and the plaintiff was in California; the property which was the consideration for the security was located in California; the transaction's center of gravity was arguably as much in California as in Utah. Both Utah and California have an interest in preventing fraudulent securities transactions within their borders and in enforcing their own securities laws. Neither state would find it desirable to foster violations of the federal securities laws, even though a particular transaction might not clearly violate the state law. The securities acts of both states measure damages according to the Out-of-Pocket Rule as does the federal act. In addition, neither state should be inclined voluntarily to reward any sharp dealing engaged in by plaintiff in the valuation of his own land if he could otherwise be reasonably compensated for his loss. Hence, measuring damages in accordance with the California and federal rules does violence to no public policy of the State of Utah, and in fact fosters that policy as indicated by Utah's own securities statute, Utah Code Ann. § 61-1-22 (Repl. Vol. 1968), which in corresponding cases permits recovery of the consideration paid for a security together with interest, costs, and attorney's fees less income received.

Under the circumstances of this case, therefore, there seems really no basic conflict between the Utah and California policies and I conclude that Utah would not reject the out-of-pocket loss measure of damages.¹⁴ In any event, as suggested in Hartwell Corp. v. Bumb, 345 F.2d 453, 13 A.L.R.3d 868 (9th Cir. 1965) and United States v. Ben Grunstein & Sons, 137 F.Supp. 197 (D.N.J.1965), courts should not blindly adhere to a particular measure of damages in circumstances rendering it unjust when there is a reasonable measure that is more appropriate and just is available. I think the Out-of-Pocket measure is just that.

I have also concluded — and somewhat reluctantly — that I cannot award attorney's fees either as an element of plaintiff's damages or as a part of his taxable costs. Under the authorities from superior courts, the decisions of which bind me, support for such an award would have to be found in a statute unless there were extraordinary circumstances not present here.

On the equities, it must be recognized that the successful litigant does not recover the full "value" of a security of which he has been deprived by fraud when he must pay substantial attorney's fees out of his judgment; and attorney's fees would appear to be a logical component of a judgment that in fact fully compensates a defrauded plaintiff. When a statute expressly allows the recovery of "value" or "reasonable compensation" or the amount of the "loss", or other similar measures, it does not require a great deal of logical manipulation to preserve the full value of the compensation contemplated by the statute by including attorney's fees in the award.¹⁵ That, however, is not the situation here. The Securities Exchange Act of 1934 does not expressly create a private right of action for violations of Rule 10b-5; the right has been implied by the courts from the general provisions of the Act.¹⁶ Thus, to imply the right to attorney's fees in civil actions under Rule 10b-5, the courts would be basing an implication on an implication — an implied right to attorney's fees based upon an implied civil liability.^16a Although not impossible in view of the modern acceptance of evidentiary inferences drawn upon inferences, such a feat requires more mental and conceptual agility than I can now muster in view of the following authorities which at best deflate the very idea and at worst prohibit it: Fleischmann Distilling Corp. v. Maier Brewing Co., 386 U.S. 714, 87 S.Ct. 1404, 18 L.Ed. 2d 475 (1967). Cf. Sprague v. Ticonic Nat'l Bank, 307 U.S. 161, 59 S.Ct. 777, 83 L.Ed. 1184 (1939); New Park Mining Co. v. United Steelworkers of America, Local Union No. 4264, 288 F.2d 225 (10th Cir. 1961); United Pac. Ins. Co. v. Northwestern Nat. Ins. Co., 185 F. 2d 443 (10th Cir. 1950) (in the absence of agreement right to attorney's fees purely statutory since right did not exist at common law); Michigan Public Serv. Comm'n v. Mackinac Transp. Co., 43 F.R.D. 202 (W.D.Mich.1966).

I have concluded that an award of attorney's fees in this case cannot be based upon the Securities Exchange Act and can find no other statutory authorization for such an award. Utah's Uniform Securities Act¹⁷ does not apply because the actual sale occurred outside the State of Utah.¹⁸ In a sense, the transaction here is sufficiently relevant to the subject matter of the state statute to make attractive the idea of rendering plaintiff's remedy complete by awarding attorney's fees by analogy to the state statute. Were it not for the circumstance that the sale of the security occurred outside the State of Utah, the Utah statute providing for attorney's fees would clearly be applicable. The theory of using the Utah provision by...