Herm v. Stafford
| Citation | 663 F.2d 669 |
| Parties | Blue Sky L. Rep. P 71,681, Fed. Sec. L. Rep. P 98,335 Louis L. HERM; Bertha M. Herm; Andrew A. Jutt; Benjamin F. Williams; and Virginia Russ, on behalf of themselves and all other persons other than the defendants who purchased on or after |
| Decision Date | 11 September 1968 |
| Court | United States Courts of Appeals. United States Court of Appeals (6th Circuit) |
J. Vernon Patrick, Jr. (argued), Lee H. Zell, Thomas J. Gallo, Berkowitz, Lefkovitz & Patrick, Birmingham, Ala., Spencer E. Harper, Jr., William W. Davis, Harper, Ferguson & Davis, Louisville, Ky., for plaintiffs-appellants.
Edward A. Marye, Jr. (argued), Clay, Williamson, Rabe, Marye & Cowden, Mount Sterling, Ky., for defendants-appellees Alves, Chandler, Jr., and Dunlap.
W. Stuart McCloy, Sr. and W. Stuart McCloy, Jr. (argued), McCloy, Dudley, Yawn & McCloy, Memphis, Tenn., Joseph R. Gathright, Jr., McCoy, Brockman & Gathright, Louisville, Ky., for defendant-appellee Rogers Badgett, Jr.
Donald H. Balleisen (argued), Richard A. Getty, Greenebaum, Doll & McDonald, Louisville, Ky., for defendant-appellee Carling Dinkler, Jr.
Before LIVELY, ENGEL and KEITH, Circuit Judges.
Plaintiffs, a class of persons who purchased Daniel Boone Fried Chicken (DBFC) stock after September 11, 1968 1 or received such stock in a merger with Commonwealth Security Investors (CSI), appeal from summary judgment entered against them in this securities case.
The district court granted summary judgment in favor of the defendants based on the expiration of the statute of limitations. There are three basic issues involved in this appeal. We must decide whether the district court borrowed the correct Kentucky statute of limitations for claims brought under various provisions of the federal securities laws. We must also determine if the court correctly decided that the statute had run before the defendants were named in a complaint. Also properly before us on this appeal is whether, in the alternative, the motions for summary judgment should have been granted on the merits.
The original complaint was filed on June 23, 1970. The five defendants involved in this appeal were first named in a second amended complaint filed on October 20, 1972. 2 Carling Dinkler, Jr., was allegedly a de facto or de jure director and a controlling person of DBFC. The other four defendants, Albert B. Chandler, Jr., R. Haywood Alves, Rogers Badgett, Jr., and Whitney Dunlap (the Directors) were directors of a company which merged itself into DBFC. The complaint alleged violations of the Securities Act of 1933 (1933 Act), the Securities Exchange Act of 1934 (1934 Act), the Kentucky Blue Sky statutes, and the Investment Company Act of 1940.
To analyze the appeal correctly, great care must be exercised to separate the particular facts as they relate to each defendant and the various causes of action alleged in the complaint. We describe, therefore, the posture of each party in relation to the events which later occurred.
A. DBFC, an unsuccessful fast food franchise operation, habitually overestimated its financial capabilities. Judge Hogan described the condition of DBFC in SEC v. Commonwealth Securities, Inc., No. 2161 (E.D.Ky. October 21, 1970):
After the expenditure of some $60,000 in "accounting fees," we note somewhere in this record that a bookkeeping firm, after spending nine months, still hasn't brought the postings up to date. It is pretty obvious from this record that DBFC, speaking both from a business point of view and an economic point of view and an accounting point of view, never knew whence it was coming from, where it was or where it was going. It became the subject of an insolvency receivership, as we have noted, in the Kentucky Circuit Court in July of 1970 at the tender age of two and a half years.
DBFC attempted to have name personalities associated with itself as an integral part of its marketing campaign. For example, the former governor of Kentucky and former baseball commissioner, A. B. "Happy" Chandler, Sr., became associated with the organization. DBFC sought to fill its board of directors with sports figures, known socialites and entertainment personalities.
B. Carling Dinkler, Jr., one of the defendants, is a socialite who lives and works at the Palm Bay Club in Miami, Florida. He was previously associated with the Dinkler hotel chain.
Dinkler was identified as being on the DBFC Board of Directors by a press release dated May 14, 1969:
MIAMI, FLA-Well-known hotel tycoon and socialite Carling Dinkler, Jr. announced today that he's been named to the Board of Directors of the Kentucky-based Daniel Boone Fried Chicken operation, due for nationwide introduction later this year.
In so doing, Dinkler joins forces with Hollywood star, Sammy Davis, Jr., former Kentucky governor and Senator and one-time baseball commissioner A. B. "Happy" Chandler as well as a cluster of top-ranked names from the world of sports.
Dinkler, president of the Dinkler Plaza Hotel in Atlanta, Ga., is also co-owner, with his wife Connie, of Miami's plush Palm Bay Club.
The quick service food operation, headquartered in Lexington, Ky., is barely a year old. In the past 60 days it moved into the spiraling franchise market and already more than 200 units have been sold across the country and in Mexico, according to Dinkler. Plans call for expansion into several European markets.
Locally, Dinkler said, Daniel Boone will have three outlets in the Greater Miami area, with contracts on those franchises already signed.
Presently, there are 20 company-owned Daniel Boone outlets throughout Kentucky, and although it has done no national advertising, word-of-mouth has spread its success to where it has received more franchise requests than it can now handle.
By year's end the company hopes to have the bulk of the first two hundred franchises in operation at which time it plans extensive, widespread publicity campaigns.
Others on the Board include former Boston Celtics basketball standout Frank Ramsey; Baltimore Colts running back Tom Matte; professional tennis ace, Butch Buckholz; former Miami Dolphin Rick Kessner, former Kentucky securities commissioner Daniel Stafford, president of the company, and Leonard F. Nave, Governor Chandler's law partner who serves as legal counsel for the corporation.
This press release was written by a Roger Reece, a public relations consultant in Miami. The information in the release was provided by DBFC and was not cleared in advance with Dinkler. The release grossly overstated DBFC's position in the market and its prospects for the future.
A "press conference" took place on May 14, 1969 at the Palm Bay Club. 3 Dinkler arrived at the event late and read the press release. Copies of the release were distributed to the media. In his deposition, Roger Reece identified the release as having appeared in the Miami Herald, the Florida Business Leader, the Miami News and the Miami Beach Sun. He also heard brief references to the press release on three radio shows. Pictures taken at the press conference included a staged signing at which Dinkler posed with representatives of DBFC.
Dinkler was also listed as a member of the DBFC Board of Directors in the program for a tennis tournament, called the Daniel Boone Fried Chicken Challenge Cup, held in Lexington, Kentucky on May 20, 1969. He was also named as a DBFC Board member in a press release welcoming sportscaster Frank Gifford to the DBFC Board. This particular press release was distributed to the financial news desks in a seventeen state area. Again, information for this release apparently came directly from DBFC. Finally, a movie shown to DBFC shareholders identified Dinkler as a member of the Board.
It is not clear whether Dinkler was ever actually elected to the DBFC Board of Directors. 4 It is also not clear whether Dinkler was to be compensated for his services, although there are indications in the record that some DBFC stock had been set aside for him. Counsel for DBFC stated in his deposition that he understood that Dinkler was to receive some DBFC stock when he joined the DBFC Board of Directors.
Dinkler was first deposed on April 2, 1971. He asserted he had never discussed the business affairs of DBFC, was not on the Board of Directors, had no franchise interest in DBFC, and had never seen any articles connecting him with DBFC. He also asserted that he had made no statement to the media and had not authorized the use of his name or his picture by DBFC.
Dinkler did admit that he had previously offered to give advice to his friend J. Dan Chandler in setting up a fast-food chicken business. Dinkler denied, however, that he ever saw the press release of May 14, 1969 and stated that he did not remember the meeting at the Palm Bay Club on that date. He could not recognize the individuals in the pictures taken at the time of the press conference and could not identify what he was signing in a photograph taken that day. He also asserted that he was not aware that he would be identified as a DBFC Board member in the tennis tournament program.
Dinkler was deposed again on December 13, 1974, after having witnessed the deposition of Roger Reece. He recalled having participated in the May 14, 1969 press conference and was able...
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