Goodman v. Kennedy

• Citation: 18 Cal.3d 335,134 Cal.Rptr. 375,556 P.2d 737
• Parties: , 556 P.2d 737, Fed. Sec. L. Rep. P 95,829 Melville GOODMAN et al., Plaintiffs and Appellants, v. J. Joseph KENNEDY et al., Defendants and Respondents. L.A. 30465.
• Decision Date: 29 November 1976
• Court: United States State Supreme Court (California)

Page 375

134 Cal.Rptr. 375

18 Cal.3d 335, 556 P.2d 737, Fed. Sec. L. Rep. P 95,829

Melville GOODMAN et al., Plaintiffs and Appellants, v. J. Joseph KENNEDY et al., Defendants and Respondents.

L.A. 30465.

Supreme Court of California.

Nov. 29, 1976.

Hecht & Diamond and Roger Jon Diamond, Pacific Palisades, for plaintiffs and appellants.

Cary A. Rosen and Rosen, Ross, Fields & Zax, Beverly Hills, for defendants and respondents.

WRIGHT, Chief Justice.

Plaintiffs seek damages from defendant Kennedy, an attorney, for losses they incurred on certain shares of stock purchased from Kennedy's clients, who were principal officers of the corporation issuing the stock. Plaintiffs allege that defendant ¹ negligently advised his clients that the shares in question could be issued to them as stock dividends and sold to third persons without jeopardizing the exemption from the requirement of registering the corporation's stock under the Securities Act of 1933 (the Act) theretofore granted under Regulation A of the Securities and Exchange Commission (SEC). (See 15 U.S.C. § 77c(b); 17 C.F.R. §§ 230.251--230.263.) Plaintiffs also allege that defendant had a telephone conversation concerning the proposed stock purchase with an attorney representing two of the three plaintiffs in which defendant failed to advise that attorney of certain facts allegedly material to the necessity for the SEC exemption and the effect the proposed purchase might have on its continued existence. Defendant allegedly withheld this information for the purpose of deceiving plaintiffs and plaintiffs allegedly relied on the nondisclosure in purchasing the stock. The alleged result of the purchase was an order by the SEC suspending the exemption with consequent loss in the stock's value, to plaintiffs' damage.

A general demurrer to plaintiffs' third amended complaint alleging these facts was sustained without leave to amend and plaintiffs appeal from the ensuing dismissal. Their appeal presents the legal question of whether or under what circumstances an attorney's duty of care in giving legal advice to a client extends to persons with whom the client in acting upon the advice deals wholly at arm's length. Applying criteria announced in our prior decisions, we conclude for reasons to be explained that the present defendant had no such duty in the absence of any showing that the legal advice was foreseeably transmitted to or relied upon by plaintiffs or that plaintiffs were intended beneficiaries of a transaction to which the advice pertained. Nor under the alleged circumstances did defendant have any duty toward plaintiffs during his alleged conversation with their attorney to bring up the subject matter of his prior advice to his clients. No facts are alleged that would give rise to any such duty such as defendant's making any statement that would be misleading without the disclosure.

Plaintiffs also assert causes of action for fraud and for violation of provisions of the Corporate Securities Law of 1968 (Corp.Code, § 25400, subd. (d), § 25401) based on the same alleged nondisclosures. These causes of action likewise fail for lack of any factual allegations giving rise to a duty to disclose.

Negligence

The negligence claims of plaintiffs Stanley D. Davidson, Marvyn Davidson and Melville Goodman are separately stated in the first, fourth and seventh causes of action respectively of the third amended complaint. They allege: Defendant was a director and officer of Motel Managers Training School, Inc. (the corporation). At all relevant times the exemption from registration provided by the SEC's Regulation A was limited to stock issues having an aggregate offering price of not more than $300,000. (See 15 U.S.C. § 77c(b) (prior to 1970 amendments); 17 C.F.R. § 230.254 (prior to 1972 amendment).) During the fall of 1968 defendant negligently advised Soma and Spencer, the corporation's principal officers, that they 'could cause the (corporation) to issue to each of them additional shares in the form of stock dividends, and that they could sell those additional shares to third persons with the result that the proceeds received from the sale of those shares would not be computed in the aggregate offering price under Regulation A.'

The actual issuance of shares pursuant to this advice is not directly alleged but can be inferred from other allegations. It is alleged that 'with respect to the additional shares issued to . . . Soma and . . . Spencer, no escrow arrangement was made as required by Rule 253(c),' which provides that securities issued to the corporation's officers and not placed under such escrow arrangement must be included in the computation of the amount of the Regulation A offering. (See 17 C.F.R. § 230.253, subd. (c)(2).) Also alleged only by implication are the facts that the shares were issued to Soma and Spencer as stock dividends and that there had in fact been a Regulation A offering. These facts are inferable from the pleading of the previously mentioned telephone conversation as follows: 'One Sunday morning in December 1968, defendant Kennedy was contacted by Attorney Thomas Pitcher of the law firm of Gibson, Dunn & Crutcher, acting on behalf of plaintiffs Marvyn Davidson and Stanley D. Davidson, to discuss the proposed sale of (the) stock from Soma and Spencer to Marvyn Davidson and Stanley D. Davidson.' There is no further allegation of what Was said during this conversation but it is alleged that defendant did Not state to Pitcher (1) 'that the (corporation) had begun a Regulation A offering on September 30, 1968, and completed that offering on October 25, 1968,' (2) 'that the stock being sold to (the Davidsons) was received from the (corporation) as stock dividends,' (3) 'reasons why the securities would be exempt from registration as exempt securities or on a transaction exemption,' (4) 'the possibility that the (SEC) could integrate the new stock with shares previously sold by the (corporation) under Regulation A, with the result that the entire Regulation A exemption might be lost,' and (5) 'that Soma and Spencer were underwriters under Section 2(11) of the Act.' ² These Omissions in defendant's statements to Pitcher were allegedly made 'for the purpose of deceiving him and his clients and obtaining the result of (each) plaintiff's purchase of stock from Soma and Spencer.'

It is alleged that in January 1969, plaintiffs Stanley D. Davidson and Marvyn Davidson each purchased 3,000 shares of the stock for $40,500 and plaintiff Melville Goodman purchased 3,000 shares for $54,000. Plaintiffs allegedly made these purchases and thereafter retained the shares 'relying upon representations made by (defendant) to Pitcher, and thereafter conveyed by Pitcher to (each plaintiff) that the transaction was not in violation of the (Act).' However, no express representation of such nonviolation is alleged to have been made by defendant during the telephone conversation and plaintiffs acknowledged in a memorandum to the trial court in opposition to the demurrer that the misrepresentation on which they assertedly relied consisted only of defendant's silence in the face of what they claim was a duty to disclose. Indeed the previously mentioned allegation that defendant omitted any statement to Pitcher of 'reasons why the securities would be exempt from registration' further negates any claim that defendant affirmatively represented the legality of the transaction.

As to damages, it is alleged: The SEC temporarily suspended the Regulation A exemption on September 29, 1969, and permanently suspended it on April 17, 1970, 'for exceeding the ceiling allowed under the terms and conditions of Regulation A.' '(T)he sale to plaintiff(s) . . . violated the Regulation A exemption for which an injunction (suspension) issued.' The suspension caused the value of the stock to depreciate to plaintiffs' damage. The stock has become valueless and the sellers are insolvent and cannot respond to a judgment for damages or restitution.

Plaintiffs' causes of action for negligence thus rest on defendant's asserted liability for his (1) negligent advice to his own clients that the stock could be sold without vitiating the exemption from registration under Regulation A and (2) conscious nondisclosure of matters which would have indicated the possibility of such adverse consequence to the attorney for two of the plaintiffs in a conversation initiated by that attorney to discuss the proposed sale of some of the stock to those plaintiffs. ³ Plaintiffs assert that if defendant should have reasonably foreseen that this negligent advice or conscious nondisclosure would economically damage plaintiffs he should be liable for such damage. However, there can be no such liability unless defendant owed a Duty to plaintiffs to avoid the asserted wrongdoings. Whether such a duty existed is a question of law and depends on a judicial weighing of the policy considerations for and against the imposition of liability under the circumstances. (Weirum v. RKO General, Inc. (1975) 15 Cal.3d 40, 46, 123 Cal.Rptr. 468, 539 P.2d 36; Amaya v. Home Ice, Fuel & Supply Co. (1963) 59 Cal.2d 295, 307, 29 Cal.Rptr. 33, 379 P.2d 513; see Dillon v. Legg (1968) 68 Cal.2d 728, 734--735, 69 Cal.Rptr. 72, 441 P.2d 912.)

We consider first whether defendant owed any duty of care to plaintiffs in advising his own clients concerning the legal consequences of a possible sale of the stock. Plaintiffs rely for the existence of such a duty upon our decisions holding that an attorney may be liable to the intended beneficiaries of a deceased testator for the amount the intended beneficiary would have received from the testator's estate if the attorney had exercised due care in drafting the will in accordance with the testator's expressed wishes. (Heyer v. Flaig (1969) 70 Cal.2d 223, 74 Cal.Rptr. 225, 449 P.2d 161; Lucas v. Hamm (1961) 56 Cal.2d 583, 15 Cal.Rptr. 821, 364 P.2d 685.) The forerunner of these...