Chiodo v. General Waterworks Corporation

• Decision Date: 03 July 1967
• Docket Number: No. 8876.,8876.
• Citation: 380 F.2d 860
• Parties: Vincent CHIODO et al., Appellants, v. GENERAL WATERWORKS CORPORATION, a corporation, Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

380 F.2d 860 (1967)

Vincent CHIODO et al., Appellants, v. GENERAL WATERWORKS CORPORATION, a corporation, Appellee.

No. 8876.

United States Court of Appeals Tenth Circuit.

July 3, 1967.

COPYRIGHT MATERIAL OMITTED

Calvin A. Behle, Salt Lake City, Utah, (Keith E. Taylor, Parsons, Behle, Evans & Latimer, and Adam M. Duncan, Salt Lake City, Utah, on the brief), for appellants.

Peter W. Billings, Salt Lake City, Utah, (Dale E. Anderson and Robert W. Edwards, Salt Lake City, Utah, on the brief), for appellee.

Before MURRAH, Chief Judge, and HILL and SETH, Circuit Judges.

HILL, Circuit Judge.

This case was tried to a jury and submitted upon special interrogatories under Rule 49(a). Judgment was entered upon the answers to the special interrogatories in favor of the appellee (defendant below) and the appeal is from that judgment.

Appellants, who were plaintiffs in the trial court, brought the action for rescission of a corporate stock transaction or in the alternative to recover damages by reason of the alleged violation by appellee-defendant of Securities and Exchange Commission Rule 10b-5 (Title 17, C.F.R. Section 240.10b-5) promulgated pursuant to 15 U.S.C. § 78j.

A detailed factual statement is necessary for an understanding and determination of the issues presented. On September 23, 1960, appellants Vincent Chiodo and his wife, Ethel Chiodo, who owned the controlling interest in the Bear River Telephone Company, a corporation, entered into an "Agreement and Plan of Reorganization" with appellee, General Waterworks Corporation. By the terms of this agreement, appellee agreed to deliver to the Chiodos 2.7 shares of its preferred stock in exchange for each share of Bear River common stock delivered to it by Chiodos. Under this agreement, on December 20, 1960, Chiodos delivered to General Waterworks 2481½ shares of Bear River stock and General Waterworks delivered the agreed number of shares of its preferred stock to Chiodos and other stockholders in Bear River.

Appellant Vincent Chiodo, in addition to being the largest stockholder in Bear River, had for many years prior to 1960 been the manager of the company. At the time he made the stock exchange agreement with General Waterworks, he procured a side agreement with the same company whereby he was to be retained for a period of ten years as manager of Bear River and his two sons were likewise to retain their employment with the new owners.

The events leading up to this agreement for exchange of stock are pertinent to the issues involved.

Appellant Chiodo acquired the controlling interest in the common stock of Bear River Telephone Company of Tremonton, Utah, in 1943, and at that time became manager of the telephone operation. In 1957, a missile manufacturing concern commenced operations in the area served by Bear River and a substantial expansion of telephone service in the area was necessitated. About this same time Chiodo began to have some thoughts about the sale of his company. In 1958 he asked Kander & Company of Washington, D. C., a firm that specialized in buying and selling telephone companies, to find him a buyer for his company. Lobred, who worked for Kander, procured an offer of $200,000.00 for the company in 1959 but Chiodo refused the offer. Lobred later visited Chiodo, looked over the Bear River Company and suggested an asking price of $250,000.00 for the company.¹ After his visit, Chiodo advised Lobred that he would like to make a stock trade with some company paying dividends. It was on this basis that Lobred approached appellee company in February, 1960, and some interest in the purchase was shown by an agent of General Waterworks. A meeting of the interested parties, including Lobred, was had in Chicago on May 4, 1960, in the office of appellee's attorney. A general discussion of the deal ensued and the meeting ended with an understanding that one Sanders, who had charge of appellee's telephone company's operations would personally inspect the Bear River property and Chiodo would be furnished detailed information about appellee company's various kinds of stock. The stock information was furnished by appellee for study by Chiodo and his attorney and Sanders inspected the Bear River properties.

The president of appellee company, Howard Butcher, called Chiodo on the telephone and discussed the making of a deal. A price of $250,000.00 for Bear River was discussed. Although the testimony about what was said at this time is conflicting, from all of the testimony it is apparent that this became an informally accepted price before the conversation was concluded, subject only to the working out of a plan for exchange of stock and taking care of some other details.

Thereafter, a satisfactory agreement was reached concerning the employment of Chiodo and his sons, approval of the sale was obtained from the Utah Public Service Commission and the transaction was closed in December, 1960.

In July, 1961, Chiodo and his sons, at a meeting in Denver with representatives of General Waterworks, were told of the possibility of a sale of the Bear River plant to Mountain States Telephone and Telegraph Company in which event Chiodo would be discharged from his employment. Chiodo began selling his General Waterworks stock soon after this meeting. The sale of Bear River to Mountain States did not materialize but a contract for the sale of the plant to another company was entered into by General Waterworks on October 19, 1964, and the sale was consummated in March, 1965. Chiodo had been discharged as manager of Bear River in December, 1963. He then brought suit in the Utah state court against the Bear River Company and General Waterworks and recovered a judgment in the amount of $81,264.99 under his separate employment contract.

Our first difficulty with this appeal is the sufficiency of proof to make a case. At the outset, all of the facts concerning the transaction between appellants and appellee leave us with grave doubts as to the applicability of Section 10b-5. This was something more than a corporate stock transaction, it was actually the sale of a business and the method used to convey control of the business was suggested by appellants because they derived a tax advantage therefrom and a fixed future income. During the period of time the negotiations between the parties were in progress and when the alleged false representations were made, the parties were not negotiating for the sale of corporate stock but rather for the purchase and sale of a going private business concern. We have doubt that either the Congress in enacting the Securities Exchange Act or the Securities Exchange Commission in promulgating Rule 240.10b-5 had any intention to include a business transaction such as we have here. However, we will not pursue this reasoning because there are other clear reasons why appellants cannot prevail.

Appellants, in their brief, present what they consider the broad issues of the case as follows:

1. Is common law type "reliance" a necessary element in a cause of action claimed to arise under the provisions of Rule 10b-5 duly promulgated in conformance with the provisions of Section 10(b) of the Securities Exchange Act of 1934?

2. If so, may the trial court condition recovery upon specific and substantial "reliance" upon a single misrepresentation, which single misrepresentation is only one of many made in the furtherance of an over-all plan and scheme to purchase a security?

3. Were the appellants, under the facts here involved, entitled to maintain a claim for rescission?

The first two of these points, in effect, urge error by the trial judge in his instructions to the jury. These points can be cognizable here only if appellants, at the trial, complied with the clear mandate of Rule 51, F.R.Civ. P. This court has written many times concerning its interpretation of this rule.² The cases hold, in substance, that any objections to instructions must be made of record after the court has given his instructions to the jury and before the jury retires to deliberate upon the case; and that, in making such objections, the party objecting must state "distinctly the matter to which he objects and the grounds of his objection."

We have painstakingly reviewed and considered the record before us on the sufficiency of appellants' objections to the court's instructions and they do not meet the requirements laid down by this court in the long line of decisions cited above. In a footnote we have set out verbatim the pertinent part of the colloquy between the court and counsel as shown by the record which occurred after the instructions here in question were given and prior to the time the jury retired to deliberate.³

This determination precludes appellants from raising here any question about the sufficiency of the court's instructions or of the method used by the court to submit the case under Rule 49 (a), F.R.Civ.P.⁴ We are precluded from considering appellants' first two points.

Appellants urge error by the trial court in dismissing the first cause of action alleged in their amended complaint. This cause of action sought rescission of the entire transaction between appellants and appellee. The procedural history of the case is pertinent to a determination of this point. Appellants filed their first complaint on October 2, 1964, in which they sought only to recover damages from appellee. On October 28, appellee filed its motion to dismiss for failure to state a claim, for lack of jurisdiction and for lack of proper venue, which motion apparently was never heard by the court. On February 15, 1965, by leave of court, appellants filed an amended complaint setting out two causes of action, the first for rescission of the entire transaction and the second to recover damages because of fraud.

Appellee, on March 1, filed a motion to dismiss and strike the rescission cause of action for failure to join an indispensable party. In the motion it was alleged that...