Croy v. Campbell

• Decision Date: 22 August 1980
• Docket Number: No. 78-2517,78-2517
• Parties: Fed. Sec. L. Rep. P 97,615 Dan J. CROY and Anne S. Croy, Plaintiffs-Appellants, v. Winfield M. CAMPBELL, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 709

624 F.2d 709

Fed. Sec. L. Rep. P 97,615

Dan J. CROY and Anne S. Croy, Plaintiffs-Appellants, v. Winfield M. CAMPBELL, Defendant-Appellee.

No. 78-2517.

United States Court of Appeals Fifth Circuit.

Aug. 22, 1980.

Jack McClendon, Lubbock, Tex., for plaintiffs-appellants.

Baker & Botts, Stephen G. Tipps, Daryl Bristow, Houston, Tex., for defendant-appellee.

Appeal from the United States District Court for the Southern District of Texas.

Before RUBIN and POLITZ, Circuit Judges, and SMITH ^*, District Judge.

ORMA R. SMITH, District Judge:

This action was brought by Dr. Dan Croy and his wife, Anne S. Croy (the Croys), who alleged that the defendant Winfield M. Campbell (Campbell), violated § 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l, § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5. After the presentation of the plaintiffs' evidence on the issue of liability, the district court granted judgment for the defendant. Plaintiffs now appeal from that judgment, contending that the district court made several errors in its findings of fact and conclusions of law. For the reasons stated below, we hold that the court's findings of fact were not clearly erroneous, and that the court applied proper legal standards in reaching its conclusions of law. ¹

The record reveals that for several years prior to 1974, the Croys had become increasingly concerned about the large amounts of income tax which they were paying. Their income had risen considerably due to some inheritance by Mrs. Croy, and their concern over the amount of tax which they were paying prompted plaintiffs to seek some tax planning advice. On February 15, 1974, they met with the defendant Campbell, who had been recommended to them by a friend. Campbell is a practicing attorney and a licensed certified public accountant, and at the time he first met the Croys, he had been practicing law for three years. He was recommended to them as being experienced in real estate and tax matters. After the initial meeting with the Croys, and after they had other opportunities to discuss proposed investments, Campbell arranged for the Croys to meet with Irby Simpkins, a real estate developer whom Campbell had represented on previous occasions. ² Mr. Simpkins was the general partner in a limited partnership which managed the Chateaux Dijon, an apartment complex in Metairie, Louisiana. Campbell had told the Croys during one of their preliminary meetings that this particular project was "the best investment so far as tax shelter was concerned" that he had ever seen. Simpkins gave Campbell a sales brochure which contained certain financial information about the project. Campbell did not prepare any of the information in that brochure, but he used it to make certain estimates and projections as to the Croys' potential tax liability. He reviewed this brochure with them, and also informed them about the method by which he calculated future depreciation. He also advised them to make an independent business judgment about the advisability of an investment in the partnership.

As of their initial meeting in February, Campbell considered himself to be the Croys' attorney. The Croys were of the opinion that the relationship was not established until approximately one month later. Regardless of the specific date, however, there is evidence which indicates that Campbell's fee for representing the Croys was to be paid by Simpkins. Dr. Croy testified that he did not learn of this fee arrangement until much later, after the Croys had invested in the project, and that he discovered that Campbell's fee was contingent upon their decision to invest. Campbell testified that there was no contingency arrangement, and that he disclosed the fee agreement to the Croys before they purchased the interest in the Chateaux Dijon.

On April 1, 1974, the Croys obtained a 60-day option to purchase a 72.17% interest in the limited partnership. The consideration for the option was $60,000, which was nonrefundable, and the total consideration for the interest was to be $502,000. On April 15, 1974, Campbell received a tax return for the Chateaux Dijon, a review of which revealed that the depreciable basis which he had previously calculated was in error. Campbell had never made an independent investigation of the projected depreciable basis, but had only utilized those figures given to him. Upon discovering this new information, he informed Simpkins that the transaction would not be completed and that the Croys were entitled to a refund of their $60,000. He then contacted Dr. Croy, informing him of the decrease in the depreciable basis, and also telling him that the Croys could get their money back. He told Dr. Croy that he thought the transaction could be renegotiated. Dr. Croy testified that Campbell told him that he had thought of a way in which the Croys could "stay in the deal which . . . is even better that the original deal." Dr. Croy instructed Campbell to proceed with the negotiations, and on May 27, 1974, the Croys became limited partners in the Chateaux Dijon. In December, 1974, the Croys purchased from Simpkins his 19.14% general partnership interest. The other interest remained in the hands of the other initial limited partners.

The plaintiffs filed their complaint in this action on July 14, 1975, alleging that the defendant had violated § 12(2) of the Securities Act by selling a security by means of a prospectus which contained certain misrepresentations, ³ and that the defendant had violated § 10(b) and Rule 10b-5, which are the general antifraud provisions of the Securities Exchange Act. ⁴ As previously stated, the district court granted judgment for the defendant at the conclusion of the plaintiffs' case. The court found that Campbell was not a "seller" of the security for the purposes of § 12(2), that he made no misstatements or omissions of material fact, and that the Croys were estopped by their own conduct from asserting that Campbell should have conducted a more thorough investigation of the project. It is these three findings which the Croys now contend are in error, and to which the court will address itself.

I.

Section 12(2) of the Securities Act imposes liability on one who "offers or sells" a security by means of a prospectus which contains material misstatements or omits material facts. In order for Campbell to be liable under this section, therefore, he must be a seller of the security. To define the scope of the term "seller", however, the court should look to the purpose of the Securities Act, which is to ensure that potential investors are provided with all material information concerning public offerings of securities. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 195, 96 S.Ct. 1375, 1382, 47 L.Ed.2d 668, 678 (1976). The Act attempts to provide for the "unrestricted flow of information and funds," Chris-Craft Industries, Inc. v. Piper Aircraft Corp., 480 F.2d 341, 357 (2d Cir.), cert. denied, 414 U.S. 910, 94 S.Ct. 231, 38 L.Ed.2d 148 (1973), and in order to accomplish that purpose the statutory scheme places disclosure requirements on those with access to relevant information.

Considering the broad construction which should be given to the Act in order to effectuate its remedial purpose, this Court has held that one need not be in "strict privity" with the purchaser, nor is one required to be the "person who passes title" in order to be a seller of the security under § 12(2). Hill York Corp. v. American International Franchises, Inc., 448 F.2d 680, 692 (5th Cir. 1971). In Hill York, this court held that where the defendants, who were the promoters of a nationwide franchise operation, "were the motivating force behind (the) whole project," 448 F.2d at 693, they should be held liable as sellers under § 12. The court held that the proper test to be applied was one of proximate cause:

the line of demarcation must be drawn in terms of cause and effect: To borrow a phrase from the law of negligence, did the injury to the plaintiff flow directly and proximately from the actions of this particular defendant?

448 F.2d at 693, quoting Lennerth v. Mendenhall, 234 F.Supp. 59, 65 (N.D.Ohio 1964). ⁵

In the particular fact situation presented by Hill York, the following factors persuaded the court that the defendants proximately caused the plaintiff's injury:

The (defendants) sought out the original incorporators of Florida Franchise and then trained them to solicit additional capital for the corporation. They provided the sales brochures designed to secure the additional capital. They rendered advice on every aspect of the corporate formation and subsequent development. In fact, the defendants did everything but effectuate the actual sale.

448 F.2d at 693. See also, Lewis v. Walston & Co., Inc., 487 F.2d 617, 621-22 (5th Cir. 1973), where the court reaffirmed the principle established in Hill York, that one need not be in privity with the purchaser to be liable as a seller. In that case, the defendant was a registered broker's representative who "touted the . . . stock heavily to the plaintiffs", and arranged the initial meeting at which the stock was sold. The court held that, in view of these established facts, the jury could have reasonably inferred that the defendant was a "substantial factor" in causing the purchases. 487 F.2d at 622.

This court has only recently addressed the question of liability under section 12(2), in a case involving substantially different facts. In Pharo v. Smith, 621 F.2d 656 (5th Cir. 1980) the court held that a reading of Hill York and Lewis limit limits sellers under section 12

(i) to those in privity with the purchaser and (ii) to those whose participation in the buy-sell transaction is a substantial factor in causing the transaction to take place. Mere participation in the events leading up to the transaction is not enough.

621 F.2d at 667. Participation in the...