Hill York Corp. v. American Internat'l Franchises, Inc.
| Decision Date | 15 October 1971 |
| Docket Number | No. 30516.,30516. |
| Citation | 448 F.2d 680 |
| Parties | HILL YORK CORPORATION et al., Plaintiffs-Appellees, v. AMERICAN INTERNATIONAL FRANCHISES, INC., et al., Defendants, Gurn H. Freeman et al., Defendants-Appellants. |
| Court | U.S. Court of Appeals — Fifth Circuit |
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Gurn H. Freeman, pro se.
Jack Ward Freeman, pro se.
T. R. Browne, pro se.
Thomas H. Seymour, Kelly, Black, Black & Kenny, P.A., Miami, Fla., for plaintiffs-appellees.
Before GODBOLD, SIMPSON and CLARK, Circuit Judges.
This appeal raises substantial and complex questions involving the Securities Act of 1933. Defendants-Appellants, the Freemans and Browne, have appealed from a jury verdict awarding rescission of certain stock sales and punitive damages to plaintiffs-stock purchasers. Basically the issues revolve around whether the defendants have violated Sections 5 and 12(2), but in order to resolve these issues a detailed consideration of the facts is necessary in addition to a microscopic view of various provisions of the Act. Since the jury, in answer to interrogatories on the material elements of Section 5 and Section 12(2) violations, found against the defendants on all questions of liability, this Court is "duty bound to accept all evidence in favor of the verdict as true and to give such evidence the benefit of all permissible inferences that would help sustain the jury's decision." Little v. Green, 428 F.2d 1061, 1066 (5th Cir. 1970). See also Southern Pacific Co. v. Jordan, 395 F.2d 209 (5th Cir. 1968); Fidelity and Casualty Co. of New York v. Funel, 383 F.2d 42, 44 (5th Cir. 1967).
The evidence viewed in this light indicates that the Freemans and Browne had developed a franchise promotion scheme designed to funnel funds from the sale of stock in certain franchise sales centers to themselves as stockholders of American International Franchises, Inc. (American). The Freemans formed American in Springfield, Missouri, in July 1967 with Browne joining one month later as Executive Vice President. These three individuals comprised all of the officers and stockholders of American.
The franchising concept conceived by the Freemans involved the marketing of two restaurant franchises called Hickory Corral and Italian Den. The Chairman of the Board of Directors of Hickory Corral was Gurn Freeman, and the Chairman of the Board of Italian Den was Jack Freeman. The only restaurant of either type to be operated was one Hickory Corral which opened in Springfield, Missouri, and closed shortly thereafter. Under the plan commonly used, American would seek out local investors to incorporate a state-wide or regional franchise sales center. The payment of a franchise fee to American conferred upon this sales center the exclusive right to sell Hickory Corral and Italian Den franchises within the State or region. The local investors who formed the franchise sales center corporation would sell stock in the corporation to a small number of persons who would be most likely to furnish supplies and services to the restaurants; for instance, a real estate firm, an air conditioning company or a builder. American was also in the franchise consulting business and was to assist the local investors in organizing and developing the business of the sales center.
Several years prior to the transactions in question, these defendants formed another franchise operation named Nationwide Motorists Association (Nationwide). Nationwide was in the business of selling automobile club franchise distributorships throughout the United States. These statewide distributorships would in turn sell the franchise and the club membership package to independent insurance agencies. These agencies would market club memberships directly to the motoring public. In December 1967, the Securities Exchange Commission (S.E.C.) commenced an investigation of Nationwide and its officers and subpoenaed the Freemans to produce Nationwide's corporate records. The Freemans responded by denying they possessed any records. The ultimate outcome of the investigation is unclear, but no final disposition had been effectuated by the S.E.C. at the time of the transactions here in question.
During the first year of operation, the defendants formed the following franchise sales centers: Texas Franchise Systems, Inc.; Midwest Franchise Systems, Inc.; Georgia Franchise Systems, Inc.; Southeastern Franchise Systems, Inc.; Colorado Franchise Systems, Inc.; and Florida Franchise Systems, Inc. (Florida Franchise), the sales center involved in this case. During the period of the stock sales in Florida Franchise, the defendants' other sales centers were the object of investigations by various state securities commissions. Shortly after all of the stock of Florida Franchise had been sold, two of the sales centers, Texas Franchise and Southeastern Franchise, were ordered to cease and desist operations, although this order was later lifted for Southeastern Franchise.
Florida Franchise was formed by dispatching Browne and William Osborne to Miami for the purpose of soliciting pre-incorporation subscriptions from Florida investors. An advertisement was placed in a local newspaper seeking a "Vice President of Marketing" for the proposed franchise sales center. When responses to the advertisement were received, the applicant was interviewed and asked to complete a financial statement indicating his net worth. If the applicant's net worth statement reflected an ability to invest in the proposed sales center, he was then told that to be hired by American, he would have to invest 5,000 dollars. The three applicants thus chosen to incorporate Florida Franchise were Shepherd, Quinn and McDaniel. The initial capitalization of 15,000 dollars invested by these three men was utilized to pay salaries and the expenses of Browne and Osborne in organizing the new sales center. Shepherd, Quinn and McDaniel were instructed by the defendants as to the solicitation of additional capitalization for Florida Franchise. This instruction included advice on what kind of investors to approach and the nature of the introductory language or "sales pitch" to be used. Between July 1968 and December 1968, Shepherd, Quinn and McDaniel, utilizing the instructions of Browne and Osborne, sold the remaining stock to plaintiffs. To induce them to purchase stock, the plaintiffs were shown promotional literature prepared by American, were told that Browne was an experienced capitalization consultant, and were given glowing reports on the operations of the other sales centers. Browne admitted at trial that the statement ascribed to him was false. The plaintiffs were never informed of the S.E.C. investigation of Nationwide nor of the State investigations of the other sales centers. Indeed, when Shepherd contacted the other sales centers, he received nothing but glowing reports from them.
American purchased 10,000 dollars worth of stock out of the 70,000 dollars worth of stock available in Florida Franchise. During the formative stages of Florida Franchise, American required that two of the five directors be representatives of American. American also required that Mickey Viles, an employee of American, become the secretary-treasurer of Florida Franchise, and in addition, Browne became the Chairman of the Board and chief executive officer. Browne later resigned, and Shepherd assumed these positions. American provided all stationery, promotional material, and sales and franchise literature. Florida Franchise was required to keep all of its corporate minute books and accounting books and records at American's office in Springfield, Missouri. All bank statements of Florida Franchise were sent directly from the bank to American in Missouri. American provided a set of recommended by-laws which were adopted by Florida Franchise. Finally, American prohibited Florida Franchise from marketing any franchises unless they were supplied by American.
On October 4, 1968, American and Florida Franchise entered into a franchise agreement, utilizing a form agreement drafted by American. The price to Florida Franchise for this exclusive right to sell was 25,000 dollars. Subsequent to the payment of the 25,000 dollars, on October 22, American insisted that Florida Franchise enter into a new agreement which provided for an additional franchise fee of 1,000 dollars per month.
Plaintiffs, alleging that these activities amounted to a pyramiding scheme to funnel money to American, brought this suit for rescission of the stock sales and the return of their investments. The jury awarded rescission and a return of the stock purchase monies paid by all but two of the plaintiffs and in addition, assessed punitive damages of 60,000 dollars against American, 15,000 dollars each against the Freemans, and 10,000 dollars against Browne. Plaintiffs Quinn and McDaniel were held to be estopped to recover their investments because they had served on the Board of Directors of Florida Franchise. They have not appealed that jury determination. The third local member of the Florida Franchise board, Shepherd, did not join in this suit. American did not appeal.
Plaintiffs based their right of recovery on Section 12(1) and Section 12(2) of the 1933 Securities Act. The following issues are raised in this appeal: 1. Did the defendants violate either Section 12 (1) or Section 12(2)? 2. If the defendants are liable to the plaintiffs, may punitive damages be assessed against them? 3. Should a motion for a mistrial have been granted because of the alleged misconduct of plaintiffs' counsel?
Section 12(1) of the 1933 Securities Act, 15 U.S.C.A. § 77l(1), states:
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