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

• Decision Date: 30 November 1978
• Docket Number: No. GC 75-151-S.,GC 75-151-S.
• 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, Andrew D. Andrews, the London Guarantee and Accident Company of New York, John Doe(s), Defendants.
• Court: U.S. District Court — Northern District of Mississippi

469 F. Supp. 54

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, Andrew D. Andrews, the London Guarantee and Accident Company of New York, John Doe(s), Defendants.

No. GC 75-151-S.

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

November 30, 1978.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

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

Robert H. Taylor, Royals & Taylor, Jackson, Miss., Henderson S. Hall, Jr., Wise, Carter, Child, Steen & Caraway, Jackson, Miss., Fred A. Ross, Jackson, Miss., Tom P. Calhoun, III, Whittington, Brock, Swayze, Dale & Calhoun, Greenwood, Miss., O. Jackson Cook, Atlanta, Ga., Jack A. Travis, Jackson, Miss., L. Carl Hagwood, Campbell & DeLong, Greenville, Miss., for defendants.

MEMORANDUM OF DECISION

ORMA R. SMITH, District Judge.

This action arises under the Securities Act of 1933, (15 U.S.C. §§ 77a, et seq.) the Securities Exchange Act of 1934, (15 U.S.C. §§ 78a, et seq.) and Rule 10b-5, promulgated thereunder, (17 C.F.R. § 240.10b-5). The jurisdiction of this court is invoked pursuant to the provisions of 15 U.S.C. §§ 77v and 78aa and of 28 U.S.C. § 1337. Plaintiffs also invoke pendent jurisdiction for the adjudication of claims arising under Mississippi's "Blue Sky", Miss. Code Ann. §§ 75-71-1, et seq. (1972), and common law doctrines.

There are multiple plaintiffs and defendants. Prior to trial, the court sustained motions for summary judgment, 446 F.Supp. 357, in favor of the defendants, A. J. Gazaway; Gazaway and Scott; The Travelers Indemnity Co.; and The Travelers Insurance Co., on the basis of principles established in Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), and related decisions. During trial, plaintiffs announced a $60,000.00 settlement with the defendants, A. D. Andrews; London Guaranty and Accident Co. of New York; Fidelity and Casualty Co.; and The Continental Insurance Co.

After receiving stipulations of fact, the court conducted a non-jury trial, and, following the submission of legal memoranda, scheduled a hearing at which closing arguments were received. The action was submitted upon the evidence produced and the entire record. Upon completion of the closing arguments, the court rendered a short bench opinion which is incorporated herein by reference. In addition to those contained in the bench opinion aforesaid, the court makes the following findings of fact and conclusions of law pursuant to Rule 52(a) Fed.R.Civ.P.

FINDINGS OF FACT

1. Each plaintiff is the purchaser of a twelve (12) month maturity promissory note issued, offered, sold and delivered by National Account Systems Association, Inc. (NASA). All notes are in default and are payable with accrued interest. The plaintiffs made the following transactions:

a. W. E. Felts purchased one $10,000 note on May 24, 1974;

b. Gene A. Gist purchased one $10,000 note on April 29, 1974;

c. Clarence Bennett purchased one $40,000 note on May 11, 1974;

d. William Moyle purchased one $10,000 note on March 25, 1974; one $5,000 note on March 25, 1974; and one $2,000 note on May 7, 1974;

e. James F. Park, Sr., purchased one $12,000 note on May 6, 1974;

f. Mrs. Lige Brunson purchased one $3,600 note on April 1, 1974;

g. John F. and Judy Harper purchased one $3,000 note on April 9, 1974;

h. J. H. Franklin purchased one $6,000 note on May 17, 1974, and two $6,000 notes on May 15, 1974;

i. Herbert S. Wooley purchased one $10,300 note on March 1, 1974;

j. Bobby F. Clay purchased one $1,000 note on April 26, 1974;

k. H. Douglas Ivy purchased one $2,000 note on March 1, 1974;

l. Earl J. Winn purchased one $2,000 note on May 7, 1974;

m. Mr. and Mrs. Earl Anderson purchased one $2,000 note on May 10, 1974;

n. Mrs. Lillie M. Sellers purchased one $10,000 note on April 30, 1974;

o. Joseph F. Francis, Jr., purchased one $5,000 note on May 27, 1974.

2. The defendants are:

a. National Account Systems Association, Inc., (NASA) incorporated in Mississippi on October 4, 1973, and the issuer of the promissory notes. NASA is a voluntary bankrupt and plaintiffs have obtained leave of the Bankruptcy Court for the prosecution of this action.

b. Starco Corporation (Starco), a Delaware corporation which began doing business in Mississippi in 1971 or 1972, but which did not qualify until July, 1974. Starco is an involuntary bankrupt and plaintiffs have also obtained leave of court to prosecute this action against Starco.

c. Jackson Warehousing and Certifying, Inc., (Jackson Warehousing), incorporated in Mississippi on March 6, 1974. A judgment by default will be entered against Jackson Warehousing since no answer was filed on its behalf.

d. Edward J. Peters (Peters), a lawyer and the elected District Attorney of Hinds and Yazoo Counties, Mississippi. In connection with the issue, offer, sale and delivery of the promissory notes, Peters was the lawyer for NASA and Starco. In addition, Peters was a director and the "President" of NASA until his resignation on April 29, 1974. Peters was also the lawyer who incorporated Jackson Warehousing.

e. Charles J. Steen, the President of Starco and Vice-President of NASA. At the time of the sale of these notes, Steen had a criminal record which included convictions for mail fraud and Dyer Act violations.

f. Geraldine Steen (Mrs. Steen), the wife of Charles J. Steen. Mrs. Steen was the bookkeeper for Starco and, after April, 1974, the Treasurer of NASA. Shortly prior to the trial of this action, both Steen and Mrs. Steen were convicted of criminal fraud in the Alabama state courts in connection with the operation of National Account Services Association, Inc. (NASA of Alabama). These convictions are on appeal.

g. James Carroll Fuller, former sales manager of Starco and "President" of NASA following the resignation of Peters. Fuller was also the Treasurer and an incorporator of Jackson Warehousing.

h. Robert B. Dukes, a former employee of Starco and the "President" of Jackson Warehousing.

3. NASA or its agents utilized instrumentalities of interstate commerce in connection with the offer, sale, and delivery of the promissory notes including television commercials and telephone and mail solicitation. NASA did not file a registration statement for the sale of these notes with the Securities Exchange Commission. Moreover, NASA did not seek registration or exemption under Mississippi law until forced to do so by the Deputy Secretary of State.

4. NASA offered, sold, issued and delivered the promissory notes by means of oral and written representations contained in brochures, offering circulars, "packets" and letters. In a nutshell, the sales scheme can be described as follows:

NASA was represented to be a "factoring" company which purportedly factored the accounts receivable of established manufacturing or retail firms. It was represented that NASA purchased the receivables at a discount from firms which required a better cash flow than permitted by 60 or 90 day receivables. NASA was to have collected the receivables for face value and thus earned a profit. It was also represented that NASA "loaned" funds on the strength of receivables.

Allegedly to raise capital for factoring, NASA offered promissory notes for sale to the public. To make the notes attractive and promote sales, five principal representations were made which will be summarized here:

(a) That NASA was a "factor" as described above;

(b) That NASA would pay a high rate of return on investments (either 12% or 15% per annum);

(c) That all accounts factored or monies loaned by NASA were "fully secured and insured" by proper liens or protected by credit insurance or other insurance;

(d) That the collateral was "certified" by an independent, bonded "collateral certifying company"; and

(e) That Peters was the "President" of NASA.

5. Starco is an acronym for Steen Tire and Rubber Co. which was principally engaged in retail sales and servicing of tires, mufflers and shock absorbers. In 1968, Starco opened a service center in Huntsville, Alabama. In 1971 or 1972, Steen decided to move the Starco warehouse to Jackson, Mississippi. He also decided to purchase an existing tire store and open another service center in Jackson. In 1973, Starco was doing business in both Alabama and Mississippi and in addition, had approximately 50 dealers in eighteen states. The major portion of its business was in interstate commerce.

6. Steen met Peters when Steen moved to Mississippi. Peters was a part-time district attorney who, under Mississippi law, was permitted to maintain a private civil practice. Starco retained Peters as its lawyer in connection with the purchase of the tire store in Jackson. Peters continued to represent Starco as its lawyer including the period of the sale of these promissory notes. Peters did not know of Steen's criminal past although, as District Attorney, he had access to these records. Peters had little corporate legal experience and no experience with or knowledge of securities law.

7. Starco had apparently been "borrowing" funds from NASA of Alabama, a corporation headquartered in Huntsville which ultimately sold in excess of $4,000,000 of promissory notes to residents of several states.

8. In 1973, Steen retained Peters to organize NASA in Mississippi and to serve as its legal counsel. Peters' legal fees were to have been paid as a percentage of NASA's "profits" from factoring. Steen explained to Peters that NASA would operate on a plan similar to the scheme which was operating successfully in Alabama.

The operation of NASA of...