Dwoskin v. Rollins, Inc., 78-3655

• Decision Date: 16 January 1981
• Docket Number: No. 78-3655,78-3655
• Citation: 634 F.2d 285
• Parties: Fed. Sec. L. Rep. P 97,824 Nathan DWOSKIN et al., Plaintiffs-Appellants, v. ROLLINS, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 285

634 F.2d 285

Fed. Sec. L. Rep. P 97,824

Nathan DWOSKIN et al., Plaintiffs-Appellants, v. ROLLINS, INC., Defendant-Appellee.

No. 78-3655.

United States Court of Appeals, Fifth Circuit.

Jan. 16, 1981.

Gilbert H. Deitch, Gerald B. Kline, Atlanta, Ga., for plaintiffs-appellants.

Arnall, Golden & Gregory, Cleburne E. Gregory, Jr., William H. Kitchens, Atlanta, Ga., for defendant-appellee.

Appeal from the United States District Court for the Northern District of Georgia.

Before GEE and RANDALL, Circuit Judges, and LYNNE, ^* District Judge.

RANDALL, Circuit Judge:

In accordance with the terms of an Agreement and Plan of Reorganization dated as of November 28, 1967 (the "Agreement"), between the stockholders (the "Stockholders") of Dwoskin, Incorporated and Dwoskin Decorating Co. (collectively, the "Dwoskin Companies") and Rollins, Inc. ("Rollins"), Rollins acquired on January 1, 1968, all the outstanding capital stock of the Dwoskin Companies in exchange for a total of 40,000 shares of Convertible Preferred $3 Series, no par value (the "Preferred Stock"), of Rollins. The Agreement provided that the Preferred Stock was not subject to redemption during the five year period ended on January 1, 1973, but was subject to redemption thereafter, upon 30 days' notice to the Stockholders, at a price of $125 per share. The Agreement further provided that the Preferred Stock was convertible into Common Stock, $1 par value, of Rollins ("Common Stock") at any time after January 1, 1973, at the rate of 1.875 shares of Common Stock for each share of Preferred Stock, subject to certain adjustments and to specified limitations designed to impose, in effect, a floor of $5,000,000 and a ceiling of $7,000,000 upon the aggregate market value of the shares of Common Stock issuable upon conversion.

On January 3, 1973, Rollins gave 30 days' written notice to the Stockholders of its intention to redeem all the outstanding Preferred Stock at a price of $125 per share, but advised the Stockholders that they could convert each share of Preferred Stock into 7.03125 shares of Common Stock by surrendering the Preferred Stock for conversion in accordance with instructions in an enclosed letter of transmittal. The conversion ratio of 7.03125 specified in the notice of redemption was erroneous, however, because if such ratio had been applied, the market value of the Common Stock issued upon conversion would have substantially exceeded the $7,000,000 ceiling imposed by the Agreement. This fact was promptly called to the attention of the management of Rollins by one or more of the Stockholders, and on January 12, 1973, Rollins sent a letter to each of the Stockholders advising of the error and of the correct conversion rate-4.6449 shares of Common Stock for each share of Preferred Stock. During the period from January 17 through January 23, 1973, the Stockholders surrendered all the outstanding shares of Preferred Stock for conversion by sending the certificates evidencing such shares to the Bank of Delaware, the Transfer Agent for the Common Stock, as instructed by the letter of transmittal form furnished by Rollins.

Upon receipt of such certificates, the Transfer Agent for the Common Stock forwarded them to Rollins in Atlanta pursuant to instructions from an officer of Rollins; the certificates were then returned by Rollins to the Transfer Agent for issuance of the Common Stock upon conversion.

When the certificates were returned to the Transfer Agent in Delaware, yet another snag developed. The Transfer Agent discovered, and so notified Rollins, that Rollins had failed to list the Common Stock issuable upon conversion of the Preferred Stock on the New York Stock Exchange. Rollins filed a Supplemental Listing Application with the New York Stock Exchange on February 2, 1973, and the listing of the Common Stock was authorized by the Exchange on February 15, 1973. The Stockholders received the certificates evidencing the Common Stock on February 16, 1973. The certificates bore a legend to the effect that the shares represented thereby had not been registered pursuant to the Securities Act of 1933 (the "1933 Act") and could not be sold or otherwise transferred except pursuant to (i) Rule 144 of the Securities and Exchange Commission under the 1933 Act, (ii) an effective registration statement under the 1933 Act or (iii) a no-action letter from the Securities and Exchange Commission and an opinion of counsel acceptable to Rollins that the sale or transfer would be exempt from registration under the 1933 Act.

To complete the picture, the market value of the Common Stock of Rollins declined from a closing price of $34.75 per share on January 15, 1973, to a closing price of $30.13 on February 16, 1973.

The plaintiffs are four of the ten Stockholders. They filed suits against Rollins on March 18, 1976, which were consolidated by the district court pursuant to Fed.R.Civ.P. 42(a) and will be treated herein as one suit. Count I of the complaint alleged misrepresentations and omissions by Rollins in connection with the conversion of the Preferred Stock into Common Stock in violation of section 10(b) of the Securities Exchange Act of 1934 (the "1934 Act"), 15 U.S.C. § 78j(b) (1976), and Rule 10b-5 of the Securities and Exchange Commission thereunder, 17 C.F.R. § 240.10b-5 (1980). Count II alleged that Rollins was negligent in carrying out the conversion of the Preferred Stock into Common Stock. Count III alleged that Rollins had breached the Agreement in failing to make delivery of the Common Stock as therein provided. The plaintiffs sought damages measured by the difference between the market value of the Common Stock on the day they expected to receive it (approximately January 15, 1973) and the market value of the Common Stock on the day it was actually received (February 16, 1973). At the trial of the case, the district court directed a verdict for Rollins on Count I of the complaint on the ground that the evidence adduced by the plaintiffs did not present a jury question on one or more of the requisite elements of a claim under section 10(b) and Rule 10b-5. The district court retained pendent jurisdiction over the two remaining state law claims. The jury returned a verdict upon written interrogatories in favor of Rollins on the questions of negligence and breach of contract. The district court entered judgment for Rollins on September 15, 1978, and denied a motion of the plaintiffs for a new trial on October 27, 1978.

I. THE DIRECTED VERDICT ON COUNT I

On appeal the plaintiffs argue that the evidence did present a jury question on the issue of scienter and that the district court erred, therefore, in directing a verdict in favor of Rollins on this point. The standard of review in this circuit applicable to directed verdicts is set forth in Boeing Co. v. Shipman, 411 F.2d 365 (5th Cir. 1969):

On motions for directed verdict and for judgment notwithstanding the verdict the Court should consider all of the evidence-not just that evidence which supports the non-movers case-but in the light and with all reasonable inferences most favorable to the party opposed to the motion. If the facts and inferences point so strongly and overwhelmingly in favor of one party that the Court believes that reasonable men could not arrive at a contrary verdict, granting of the motions is proper. On the other hand, if there is substantial evidence opposed to the motions, that is, evidence of such quality and weight that reasonable and fair-minded men in the exercise of impartial judgment might reach different conclusions, the motions should be denied, and the case submitted to the jury. A mere scintilla of evidence is insufficient to present a question for the jury. The motions for directed verdict and judgment n. o. v. should not be decided by which side has the better of the case, nor should they be granted only when there is a complete absence of probative facts to support a jury verdict. There must be a conflict in substantial evidence to create a jury question. However, it is the function of the jury as the traditional finder of the facts, and not the Court, to weigh conflicting evidence and inferences, and determine the credibility of witnesses.

Id. at 374-75 (footnote omitted).

We begin by noting that there is some disagreement between the plaintiffs, on the one hand, and Rollins, on the other hand, as to the basis for the district court's directed verdict. The plaintiffs characterized the holding as a determination that the plaintiffs' evidence did not present a jury question on the requisite element of scienter. Rollins notes correctly that its motion for a directed verdict specified a number of grounds in addition to scienter and that in considering the motion, the district court commented on the questions of materiality, reliance and scienter. We find it unnecessary to resolve the dispute over whether the decision of the district court was based on the failure to present a jury question on elements other than scienter: the transcript clearly indicates that the district court ruled that the plaintiffs failed to present a jury question on scienter and that ruling, judged under Boeing, supra, was correct.

In Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), the Supreme Court held that scienter is one of the elements of a cause of action under section 10(b) and Rule 10b-5 and defined scienter as follows: "a mental state embracing intent to deceive, manipulate, or defraud." Id. at 194 n.12, 96 S.Ct. at 1381 n.12. The Court held that negligence will not suffice for the imposition of liability under Rule 10b-5. The Court noted that "(i)n certain areas of the law recklessness is considered to be a form of intentional conduct for purposes of imposing liability for some act." Id. The Court declined, however, to address the question whether, in some circumstances, reckless behavior is sufficient for civil liability under ...