Dupuy v. Dupuy

Decision Date09 May 1977
Docket NumberNo. 76-2667,76-2667
Citation551 F.2d 1005
PartiesFed. Sec. L. Rep. P 96,048 Milton E. DUPUY, Plaintiff-Appellant, v. Clarence O. DUPUY, Jr., Defendant-Appellee.
CourtU.S. Court of Appeals — Fifth Circuit

C. Ellis Henican, Jr., Andrew I. Brown, Carl W. Cleveland, New Orleans, La., for plaintiff-appellant.

Milton E. Brener, Arthur L. Ballin, James G. Dalferes, New Orleans, La., for defendant-appellee.

Appeal from the United States District Court for the Eastern District of Louisiana.

Before JONES, WISDOM and GODBOLD, Circuit Judges.

WISDOM, Circuit Judge:

In this brother-against-brother case, a purchaser of stock, to depress the price, misrepresented and failed to disclose material facts regarding the value of the stock. The question presented is whether the seller of the stock will be denied recovery against the purchaser under Securities and Exchange Commission Rule 10b-5 1 because the seller, who could have ferreted out the facts, failed to do so until after the sale.

The case turns on the degree of diligence required of the plaintiff, Milton Dupuy, under Rule 10b-5 when the defendant, his brother Clarence, intentionally committed acts of fraud that significantly affected the plaintiff's decision to sell the stock at a price considerably below its value. This is primarily a question for the jury to decide. Here, on interrogatories submitted to the jury, the jury decided that the plaintiff had "exercised due diligence for his protection in connection with (the) sale of the stock", 2 and awarded Milton damages of $905,000.

The trial judge granted the defendant's motion for a judgment notwithstanding the verdict. He held that there was "no evidence from which a finder of fact might have inferred any diligence on the part of the plaintiff". 3 Alternatively, the trial judge stated that "if it were not for the Court's ability to make this finding in the fashion I have, I would feel compelled to grant a new trial, because I feel under all the circumstances of the case, the size of the verdict . . . shocks the Court's conscience and also (is) contrary to the weight (of the evidence)". 4

We reverse the judgment n. o. v., but remand the case for a new trial on damages. 5

I. The Facts

Clarence and Milton Dupuy were raised in poverty in a poor section of New Orleans. They worked as children and as youths and always on a share and share alike basis. Until the dispute arose that generated this litigation the two brothers worked harmoniously for many years on real estate ventures. By 1971 they had accumulated certain valuable properties held by Les Freres Corporation, Argonne Corporation, Dupuy and Dupuy, a partnership, and Dupuy Construction Company, a partnership. The stock and the partnerships were divided equally between Clarence and Milton. Clarence was the older brother and dominated their personal relationships. He was an attorney, a successful politician, and an elected member of the New Orleans City Council. Milton did not finish college, but acquired firsthand knowledge of the construction business and real estate development. At one time he was appointed and served as President of the Orleans Parish Levee Board.

In late 1971 the Dupuys organized the Lori Corporation to acquire a valuable long-term lease on land bounded by Toulouse, Burgundy, Rampart, and St. Peter streets in the City of New Orleans. This property is within but on the edge of the French Quarter. The value of the land was enhanced when, prior to the Dupuys' acquisition of the lease, the City Council of New Orleans declared a moratorium on construction of hotels in the French Quarter, but excepted from the ban the premises just described.

To form Lori Corporation, each brother contributed $1,880 to the enterprise and received 47 percent of the company's stock. 6 Milton was president, Clarence Secretary-treasurer, and Mrs. Dupuy, their mother, vice-president. During 1971 and early 1972 Milton supervised the day-to-day development At Harris's suggestion, Milton obtained an appraisal from Mr. John D. Bird, in whom Colwell had confidence. Bird valued the project initially at $7,340,000 and the market value of the lease at $986,500,000. Because of changes in the plans, he reduced these figures respectively to $7,100,000 and $962,330,000.

                of this venture.  7  He signed the lease with the landowner, met frequently with the architect, August Perez, and assembled statistics for the necessary financing.  He and Clarence met with the president of the Bank of New Orleans, Lawrence Merrigan, and a mortgage banker, J. H. Harris (representing Colwell Mortgage Trust) to discuss financing the project.  As compensation for these duties and his management of other jointly held properties, Milton received a monthly fee of $1,150

All went well until March 30, 1972, when Clarence abruptly cut off Milton's management fee. Clarence had always controlled the checkbook. Clarence says that Milton turned his back on the project. At the time, however, Milton's monthly fees were his sole source of income; he had no substantial savings; Milton had serious kidney trouble causing increasing medical expenses; and he was supporting his present wife and child and his former wife and children. He could not borrow on his interest in the Les Freres and Argonne corporations, because he had no means of paying the debt. Milton asked Clarence to buy his interest, but Clarence offered him only a note. Milton's financial crisis forced him to find other employment. He obtained a job with Norman Brothers, real estate developers, but the work required travel to Clearwater, Florida, and to Algiers (across the Mississippi River from New Orleans). After three months, his health was so bad that he had to give up this job. He had worked for Norman Brothers from May 15 to August 18, 1972.

After his management was terminated and having no personal contacts with the development of the Lori property, Milton had to rely on Clarence for information as to what was happening to the financing of the projected hotel. Milton testified that whenever he spoke to Clarence over the telephone Clarence told him that the Lori Hotel "was having a rough time . . . everything is going downhill"; that "it's just practically worthless".

Shortly after Clarence cut off Milton's income, Clarence began negotiations with William Monteleone, owner of a well-known and long-successful French Quarter hotel. Earlier, Clarence and Milton had discussed but had never pursued the possibility of interesting Monteleone in the venture. Milton testified that Monteleone's name came up just once and then as a possible purchaser of some of Milton's stock. The banks and mortgage brokers had conditioned financing of the construction of the Dupuy hotel on the participation of someone having larger financial resources than Clarence and Milton possessed.

Clarence's negotiations with Monteleone and his representatives were extensive. A letter to the New Monteleone Hotel from Arthur L. Ballin, an attorney who represented Monteleone, shows that instead of "everything going downhill", prospects were favorable. As early as April 21, Ballin had a four-hour conference with Monteleone and Clarence to review the "proposition of joint venture and partnership in commendum". 8 On April 24 there was a two-hour conference by Ballin and Clarence to prepare a draft of the partnership. At that time, Monteleone was prepared to put up the necessary financing. On April 28 there was a two-hour conference by Ballin with Clarence and Monteleone, who expressed doubts about the joint venture. These doubts were later dissipated. Ballin The partnership agreement was executed on July 31, 1972, before Arthur L. Ballin, in his capacity as Notary Public. Clarence Dupuy appeared individually and as Secretary-Treasurer of Lori Corporation. William A. Monteleone appeared individually. The New Hotel Monteleone appeared through its duly authorized Executive President.

talked with Clarence on May 1 and arranged for a meeting the next day. May 2 Ballin met with Clarence. They were in agreement as to the partnership, but Clarence wanted and obtained an option to repurchase Monteleone's interest. May 5 Ballin had several telephone conferences and a meeting with Clarence. On May 8 Ballin again met with Monteleone and Clarence. On that day Monteleone instructed Ballin to prepare papers to complete the transaction. There followed meetings by Ballin with Clarence on May 12, to discuss provisions of the partnership agreement; on May 13, to re-draft the partnership agreement; on May 15, with Monteleone as well as Clarence, to revise the agreement; on May 17, a meeting with Clarence, after Ballin had studied the tax effects of the agreement; on May 19, a long telephone conversation to discuss the tax effects; on May 22, a meeting by Ballin with Clarence and accountants to discuss tax effects of the partnership. June 2 Ballin met with Clarence to review the revised agreement. June 6 Ballin met for three hours with Clarence and accountants to review the revised partnership agreement and tax questions. Finally, on June 7, 1972, Ballin met with Clarence and reviewed the final form of the partnership and Clarence's option. The partnership agreement called for Monteleone to put up, individually, $180,000 in cash, for which he would receive a 6 percent interest, and the New Hotel Monteleone, Inc., to put up $420,000 in cash for a 14 percent interest. The Lori Corporation would receive a 40 percent interest, for its lease to the land on which the hotel was to be built. Clarence would receive a 40 percent interest. Thus, for two months before Clarence bought Milton's stock and for one month before the putative directors' meeting approving the partnership with Monteleone, Clarence knew that the Lori stock was worth a small fortune, but not Milton, although he lived in the same apartment complex with Clarence and they shared a patio.

On that same day, July 31, 1972,...

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