Estate Counseling Service v. MERRILL LYNCH, PIERCE, ETC., 6769.

• Decision Date: 09 April 1962
• Docket Number: No. 6769.,6769.
• Citation: 303 F.2d 527
• Parties: ESTATE COUNSELING SERVICE, INC., a corporation, Appellant, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INCORPORATED, a corporation, Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

303 F.2d 527 (1962)

ESTATE COUNSELING SERVICE, INC., a corporation, Appellant, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INCORPORATED, a corporation, Appellee.

No. 6769.

United States Court of Appeals Tenth Circuit.

April 9, 1962.

Harley W. Gustin, Salt Lake City, Utah, for appellant.

Earl J. McHugh, of Brown, Wood, Fuller, Caldwell & Ivey, New York City, for appellee.

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

HILL, Circuit Judge.

This action was brought in the court below by appellant, as plaintiff,¹ to recover damages for alleged fraud, breach of fiduciary duties in violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78j(b) and Rule X-10B-5 promulgated thereunder. The suit resulted from a transaction involving the purchase of corporate common stock by the plaintiff, through the defendant as a broker. The appellee, defendant and third-party plaintiff below,² answered, denying fraud or breach of fiduciary relationship in the transaction, raised certain affirmative defenses and counterclaimed against the plaintiff for the amount of $21,217.13, the amount of the loss it occasioned by the stock transactions. As third-party plaintiff it named William A. Lang and John R. Coombs as third-party defendants, and sought to recover from them also for its financial loss in the stock purchase and sale. Plaintiff, and the third-party defendants, as part of their defense to defendant's counterclaim against them, alleged, affirmatively, the rescission of the contract to purchase the stock.

After the issues were joined and an extensive pre-trial conference had, the Motion for Summary Judgment, on behalf of defendant, appellee here, was sustained. That order of the trial court is challenged by this appeal.

The facts necessary for the disposition of the appeal are clear and uncontroverted from the record before us.

On September 26, 1959, Jack R. Coombs, as President of appellant corporation, observed that common stock of Studebaker-Packard Corporation, whether traded under "regular way" or "when issued" contracts on the New York Stock Exchange was one of the ten most active stocks. He visited appellee's Salt Lake City branch office and obtained two bulletins relating to the stock. He thereafter talked with his friend and frequent business associate, William A. Lang, about the stock. Both had prior extensive dealings in securities as associates of brokerage firms. After this discussion, Lang talked on the telephone with Walter A. Roche, appellee's branch office manager in Salt Lake City, about the stock and was advised by Roche that Studebaker-Packard common stock "when issued" was a good speculation. Later the same day, Lang met and discussed with Kenneth Aitken, registered representative of defendant in the same city, the stock purchase. Lang indicated he was interested in buying 10,000 or 20,000 shares, and, if he bought, the purchase would be made in the name of appellant because of its tax loss carry forward. At this time all of the outstanding stock in plaintiff corporation was owned by Coombs and members of his family, the corporation was actually insolvent, had no regular office except the Coombs home and had no employees.

On September 29, 1959, Lang, Aitken and Coombs conferred, and as a result, the purchase order was given to defendant to buy on the New York Stock Exchange in plaintiff's name 20,000 shares of common stock on a "when issued" basis at a price not to exceed $15.00 or $15.50 per share. The order was relayed to defendant's New York office on September 30, by Roche, and on that day Coombs was advised by Aitken that the stock had been purchased. Later that day Aitken personally delivered to Coombs and Lang confirmations of the purchases and asked payment for the margin deposit but was not paid. On October 5 Roche advised Lang and Coombs that the margin deposit of between $85,000 and $90,000 on the transaction would have to be paid. In the meantime the stock had declined in price. Lang told Roche that an alternative to paying the margin deposit was the liquidation and cancellation of the account, and as far as he was concerned the account could be cancelled. Roche refused to consent to such a cancellation. Again on October 6 demands were made on Lang and Coombs for payment of the margin deposit and refused.

On October 5 Lang and Coombs consulted with and retained Gordon I. Hyde to represent plaintiff and them in the controversy. On October 7 Hyde sent a letter to the chairman of the board of defendant corporation. The letter was composed in collaboration with Lang and Coombs and detailed charges of misrepresentation and misconduct on the part of defendant's local representatives. This letter reiterated Lang's proposal to cancel the transaction.

Thereafter, and on October 8, the law firm of Keller, Bloomenthal and Lohf, also previously retained as counsel for Coombs, Lang and plaintiff sent another letter to the chairman of the board of defendant corporation as a follow-up of the Hyde letter, and in part, stated as follows:

"This letter is written at the request of Mr. Hyde\'s clients and, in the absence of Mr. Hyde from Salt Lake City, as a follow-up to his letter of October 7, 1959, and to make clear that the aforesaid letter should be considered as a formal demand that the subject order and transaction, insofar as it concerns your firm of Estate Counseling Services, Inc., and persons interested therein, be rescinded on the basis of the material misrepresentations, omissions, and breaches of fiduciary obligation by your firm stated or referred to in the aforesaid letter, and in particular, on the following grounds:"

This letter set forth seven grounds why the contract should be rescinded.

By telegram, dated October 15, defendant rejected this last demand, and advised that unless the margin deposit was received it would sell out the stock at the opening of New York Stock Exchange at 7:00 o'clock A.M. Mountain Standard Time on October 16. The margin deposit was not paid and the stock was sold by defendant. A deficiency in the account of plaintiff with defendant in the amount of $21,217.13 resulted.

The granting of the Summary Judgment was based upon the legal theory that plaintiff, appellant here, had abandoned its right to seek damages by reason of its choice of the alternative of rescission, and under Utah law an action for damages and a rescission are inconsistent and mutually exclusive. Contemporaneously, with the granting of defendant's Motion For Summary Judgment, and with the consent of the defendant, plaintiff and the third-party defendants were given a Summary Judgment upon the counterclaim of the defendant and third-party plaintiff. An appeal was taken only from the portion of the order granting defendant a Summary Judgment.

In our approach to the legal question before us, we must as the lower court did, assume for the purpose of the motion, that plaintiff was induced by fraud and breach of fiduciary duties, to place the order to purchase the stock.

The whole doctrine of election of remedies is equitable and in applying the doctrine the court should be sensitive to equitable principles. In Minneapolis National Bank of Minneapolis, Kansas, v. Liberty Natl. Bank of Kansas City, 10 Cir., 72 F.2d 434, the court pointed out that the doctrine of election of remedy is disfavored in equity and should not be unduly extended. Friederichsen v. Renard, 247 U.S. 207, 38 S.Ct. 450, 62 L.Ed. 1075. This Court, in Bernstine v. United States, 10 Cir., 256 F.2d 697, rejected the doctrine on a procedural ground. In diversity cases, we have acknowledged the doctrine as binding following the state substantive law. Berger v. State Farm Mutual Auto Insurance Company, 10 Cir., 291 F.2d 666; First Natl. Bank in Wichita v. Luther, 10 Cir., 217 F.2d 262; Kuhl v. Hayes, 10 Cir., 212 F.2d 37.

A fruitless attempt to recover on an unavailing remedy does not constitute an election which will deprive a person of rights which are availing by a different and appropriate remedy; the remedy must at least be to some extent efficacious in order to constitute an election. Southern Pacific Co. v. Bogert, 250 U.S. 483, 39 S.Ct. 533, 63 L.Ed. 1099; Commercial Bank of Spanish Fork v. Spanish Fork South Irr. Co., 107 Utah 279, 153 P.2d 547; Welsh, Driscoll & Buck v. Buck, 64 Utah 579, 232 P. 911; Detroit Heating & Lighting Co. v. Stevens, 20 Utah 241, 58 P. 193; Utah Bond & Share Co. v. Chappel, 68 Utah 530, 251 P. 354.

For the act to be effective as an election of remedies it must be decisive and unequivocal. Such election can be accomplished by legal proceedings or by "some other decisive act." Huhl v. Hayes, 10 Cir., 212 F.2d 37; Cook v. Covey-Ballard Motor Co., 69 Utah 161, 253 P. 196, 199. See 18 Am.Jur. 145, Election of Remedies, § 22.

In 1 A.L.R.2d 1084 at 1085, the following is stated under the annotation entitled, "Notice of rescission as irrevocable election when other party refuses to assent thereto."

"In legal theory a rescission, as the word signifies, is a cutting back or severance of the contract relationship. A party entitled to avoid a transaction does so by giving notice to the other party of his decision to do so. By this notice the contract is abrogated * * *. Naturally the consent of the other party, and his return of the consideration, has never been deemed a prerequisite to the effectiveness of the annulment.

"If the facts exist which justify a rescission by one party, and he exercises his right and declares a rescission in some effectual manner, he terminates the contract, and it cannot thereafter be made the basis of an action for damages caused by a breach of its covenants.

"The doctrine of election of remedies applies in order to protect one from vexatious litigation, while the rule as to election of substantive rights has to do with the actual status of some property or contractual rights. That is to say, a person having the option to fix

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