Felts v. National Account Systems Ass'n, Inc., GC 75-151-S.

• Decision Date: 27 September 1977
• Docket Number: No. GC 75-151-S.,GC 75-151-S.
• Citation: 446 F. Supp. 357
• Court: U.S. District Court — Northern District of Mississippi
• Parties: W. E. FELTS, Gene A. Gist, Clarence Bennett, William Moyle, James F. Park, Sr., Mrs. Lige Brunson, John F. Harper, Judy Harper, J. H. Franklin, Herbert S. Wooley, S. M. Cornwall, Bobby F. Clay, H. Douglas Ivy, Earl J. Winn, Plaintiffs, v. NATIONAL ACCOUNT SYSTEMS ASSOCIATION, INC., Starco Corporation, Jackson Warehousing and Certifying, Inc., Edward J. Peters, Charles J. Steen, Geraldine Steen, James Carroll Fuller, Robert B. Dukes, Jr., L. C. Schmidt, A. J. Gazaway, Andrew D. Anders, Cummings, Gazaway & Scott, Inc., the Travelers Insurance Co., the London Guarantee and Accident Company of New York, the Continental Insurance Company, John Doe(s), Defendants.

446 F. Supp. 357

W. E. FELTS, Gene A. Gist, Clarence Bennett, William Moyle, James F. Park, Sr., Mrs. Lige Brunson, John F. Harper, Judy Harper, J. H. Franklin, Herbert S. Wooley, S. M. Cornwall, Bobby F. Clay, H. Douglas Ivy, Earl J. Winn, Plaintiffs, v. NATIONAL ACCOUNT SYSTEMS ASSOCIATION, INC., Starco Corporation, Jackson Warehousing and Certifying, Inc., Edward J. Peters, Charles J. Steen, Geraldine Steen, James Carroll Fuller, Robert B. Dukes, Jr., L. C. Schmidt, A. J. Gazaway, Andrew D. Anders, Cummings, Gazaway & Scott, Inc., the Travelers Insurance Co., the London Guarantee and Accident Company of New York, the Continental Insurance Company, John Doe(s), Defendants.

No. GC 75-151-S.

United States District Court, N. D. Mississippi, Greenville Division.

September 27, 1977.

Luke M. Dove, Jr., Chill, Chill & Dove, Jackson, Miss., for plaintiffs.

Edward J. Peters, pro se.

Henderson S. Hall, Jr., Wise, Carter, Child, Steen & Caraway, Jackson, Miss., for defendants A. J. Gazaway and Cummings.

Fred A. Ross, Jr., Ross & Ross, Jackson, Miss., for James Carroll Fuller.

L. Carl Hagwood, Campbell & DeLong, Greenville, Miss., for Travelers Ins. Co.

Tom P. Calhoun, III, Dale & Calhoun, Greenwood, Miss., for The Continental Ins. Co.

Robert H. Taylor, Jr., Royals & Taylor, Jackson, Miss., for Starco Corp.

MEMORANDUM OF DECISION

ORMA R. SMITH, District Judge.

The court has under consideration motions for summary judgment filed by defendants Arthur James Gazaway, Jr., Cummings, Gazaway & Scott, Inc., The Travelers Insurance Company and The Travelers Indemnity Company.¹ The motions have been extensively briefed and argued to the court. They are now ripe for decision.

Plaintiffs are 18 individuals who have brought suit against Gazaway, Travelers and 14 other named defendants and 15 unnamed John Doe defendants charging violation of the Securities Act of 1933 (The Securities Act) and the Securities Exchange Act of 1934 (The Exchange Act) and the rules and regulations promulgated thereunder, and the Laws of Mississippi.

The complaint alleges that each plaintiff has purchased an unregistered security in the form of a 12 month promissory note issued by defendant National Accounts Systems Association, Inc. (NASA), a Mississippi corporation owned and/or controlled by defendants Starco Corporation (Starco), a Delaware Corporation, and Charles J. Steen and his wife, Geraldine Steen (Steen), citizens and residents of Mississippi.

Plaintiffs charge that they were defrauded in the purchase of the securities and seek redress pursuant to the Federal statutes above mentioned, the Mississippi statutes relating to the sale of securities and in an action for common-law fraud. Plaintiffs charge that the court has jurisdiction pursuant to the provisions of 15 U.S.C. §§ 77v and 78aa and 28 U.S.C. § 1337.

Plaintiffs charge Gazaway and Travelers with aiding and abetting other defendants in the alleged fraudulent security transactions and with such direct fraudulent misrepresentations as to constitute commonlaw fraud. Plaintiffs also charge that Gazaway, while acting as agent for Travelers and The Continental Insurance Corporation (Continental), recklessly and negligently prepared and delivered to NASA, Starco and associated companies, letters describing certain insurance and fidelity bond coverage extended by Travelers and/or Continental to NASA, Starco, and associated companies when he knew or should have known that the letters contained untrue statements calculated to mislead the investing public.

Specifically plaintiffs charge that Gazaway, in his capacity as agent for Travelers, on October 24, 1973, prepared and delivered to Starco, a "Coverage" letter in which Gazaway listed the insurance and fidelity bond coverage which was being provided by Travelers for Starco and NASA. Gazaway advised that Travelers was providing insurance coverage for all Starco warehouses and service centers, as they were being established, which included fidelity bond coverage for each employee in the sum of $50,000.00, workmen's compensation, products liability, fire and extended risk coverage and premises liability. As to NASA, Gazaway advised that Travelers had a separate fidelity bond coverage on each of NASA's employees in the sum of $50,000.00.

Plaintiffs also charge that when Travelers cancelled the coverage Gazaway wrote the insurance with Continental also represented by him, and on April 17, 1974, sent a coverage letter to NASA certifying same or similar coverages with Continental and also that key personnel in NASA and all associated companies were covered under the fidelity bond for $1,000,000.00.

The record reflects that Travelers followed a procedure common in the industry and would not write parts of an account but would only write insurance for the entire operation. This practice was followed by Travelers in taking care of the insurance needs of Steen and the companies associated with him.

The record reflects that it is a common practice in the insurance industry for a soliciting agent, such as Gazaway, to furnish the insured, for the insured's records, a "coverage" letter denoting the coverage afforded the insured.

At the time of Gazaway's first contact with him, Steen had just started a business of a wholesale and retail car tire dealer. Steen informed Gazaway that his company, Starco Corporation (Starco), a Delaware corporation authorized to do business in the States of Alabama and Mississippi, would be rapidly expanding and the nature of its business operations would be to place small warehouses on existing tire dealers' premises and stock each warehouse with $30,000.00 worth of Starco tires. A Starco employee in each warehouse would then sell tires as needed to the adjacent tire dealer enabling the tire dealer to have a $30,000.00 inventory without having a $30,000.00 investment. For this reason, so Gazaway was informed, Starco needed not only general liability, auto liability, fire and extended coverage, and workmen's compensation coverage but also needed fidelity bond coverage. Steen also requested that Gazaway issue a "coverage" letter, which Steen could show prospective tire dealers to prove that Starco's employees and business operations were adequately insured. It was in response to this request and for this reason that Gazaway issued the initial coverage letter of August 27, 1971.

Steen controlled the operations of Starco, NASA, National Account Services Associations, Inc., an Alabama Corporation, and Jackson Warehousing Certifying, Inc., a Mississippi Corporation. Gazaway and Travelers were told by Steen that NASA was to be the funding arm for Starco.

Subsequent to the initial contact of Gazaway with Steen, Starco warehouses were opened in many different locations in Alabama, Mississippi, Florida and Georgia. As these operations were extended Gazaway wrote coverage letters outlining the coverage with Travelers and subsequently with Continental on either an annual basis or when there were significant changes in coverage. The initial coverage letter of August 27, 1971, was followed by coverage letters of August 21, 1972, October 24, 1973, and finally the coverage letter of April 17, 1974, when the account was switched from Travelers to Continental.

During March, April and May, 1974, plaintiffs purchased from NASA certain unregistered securities in the form of 12 month promissory notes bearing interest at the rate of 15 per cent interest per annum. The investments made by plaintiffs proved to be worthless and plaintiffs seek to hold Gazaway, Travelers and the other defendants liable for damages on account of alleged violations of § 17 of the Securities Act of 1933 (15 U.S.C. § 77q) and Rule 10b-5-5x (10b-5) promulgated by the Securities Exchange Commission pursuant to the authority granted by § 10(b) of the Securities and Exchange Act of 1934 (15 U.S.C. § 78j). Plaintiffs also allege violations of the anti-fraud provision of Mississippi "Blue Sky" law. See, Miss.Code Ann. § 75-71-43(b) (1972). Add...