Hines v. Data Line Systems, Inc.
| Decision Date | 22 February 1990 |
| Docket Number | No. 55976-7,55958-9,55976-7 |
| Citation | 114 Wn.2d 127,787 P.2d 8 |
| Parties | Gregory HINES, Arne Midtskog and Vance Mylroie, Respondents/Cross Appellants, v. DATA LINE SYSTEMS, INC., Donald Barnard, Jane Doe Barnard, Bruno V. Boin and Jane Doe Boin, et al., Appellants/Cross Respondents. Gregory HINES, Arne Midtskog and Vance Mylroie, Petitioners, v. DATA LINE SYSTEMS, INC., Donald Barnard, Jane Doe Barnard, Bruno Boin, and Jane Doe Boin, et al., Respondents. |
| Court | Washington Supreme Court |
Ferguson & Burdell, William Wesselhoeft, Phillip Miller, and Dennis Dunphy, Seattle, for petitioners.
Hillis, Clark, Martin & Peterson, P.S., Louis Peterson and Joel Bodansky, Seattle, for Perkins Coie.
Riddell, Williams, Bullitt & Walkinshaw, David Hoff and Howard Coleman, Seattle, for Barnard and Boin.
Van Valin & Watts, Inc., P.S., Victor Van Valin, Bellevue, for Peterson, Mason, and Morgan.
Investors 1 in Data Line Corporation who received a stock prospectus advising of the dependency on key personnel, with particular emphasis on the abilities of its President Dale Peterson, claimed in a securities fraud action they should have been informed of Peterson's brain aneurysms and operation, which information was known or should have been known to the underwriters, directors and their attorneys. Two directors and the corporation's attorneys prior to trial were dismissed on summary judgment. The investors went to trial against the remaining directors and underwriters and obtained judgments rescinding stock purchases for violations of the "Washington State Securities Act" (hereinafter State Securities Act). The defendants appealed the trial court decision and six of the eight investors cross-appealed. 2 All investors in separate appeals asked the appellate court for reversal of the summary judgments of dismissal against attorneys Perkins and Coie and directors Boin and Barnard.
The Court of Appeals certified the trial judge's decision to this court. It took jurisdiction over the two summary judgments from the trial court and affirmed the Perkins Coie dismissal and reversed the dismissal of directors Boin and Barnard and remanded them for trial. Barnard and Boin did not appeal. The investors then petitioned this court to appeal the dismissal of Perkins and Coie by the Court of Appeals.
On review, we affirm the trial court's judgments against all defendants, and affirm the Court of Appeals affirmance of the summary judgment of dismissal of Perkins Coie.
We reinstate the causes of action of the four investors who purchased their stock prior to October 15, 1982, who cross-appealed against Cline and Zirkle. We remand to the trial court to determine whether Cline and Zirkle had an affirmative defense pursuant to RCW 21.20.430.
Investors purchased $385,000 worth of stock in Data Line pursuant to a private placement of securities in 1982. Data Line was founded by Dale Peterson and Gary Morgan, former employees of Keytronic Corporation. The company was in the business of developing and marketing a product called an Optical Character Recognition Thought Reader for the banking industry. This product centered around an optical character recognition slot reader developed by Peterson, Morgan and others while they were employed at Keytronic Corporation.
Data Line's management consisted of Peterson who was the chief executive officer, and Morgan who served as the chief operating officer and executive vice-president, principally responsible for engineering, and Gary Mason.
Donald Barnard, Bruno Boin, and Robert Cline purchased a significant interest in the company and were voted to the board of directors at the first annual meeting in June 1980. In July 1981, Data Line entered into a manufacturing agreement with Keytronic. As part of this transaction, Keytronic purchased a 17.5 percent interest in Data Line. The terms of the purchase included a guaranteed seat on the board of directors for Keytronic's chief executive officer, Lewis Zirkle. Barnard, Boin, Cline and Zirkle were considered outside directors, that is directors that were not officers or involved in the day-to-day operations.
By late 1981, the board of directors determined the continuing viability of Data Line depended upon new financing. The board authorized the officers to enter into an agreement with Evans Llewellyn Securities, Inc. for the sale of stock pursuant to a private placement memorandum (hereinafter placement memorandum). Perkins Coie was retained as legal counsel with respect to the stock offering.
On June 10, 1982, Data Line and Evans Llewellyn circulated the approved placement memorandum which offered for sale 70,000 shares of the company's common stock at $25 per share. Section 9 of Data Line's placement memorandum emphasized the importance of key personnel to the company, stating:
Dependance Upon Key Personnel. The performance of the Company depends upon the active participation of its officers, including Dale L. Peterson ... The loss of any of these qualified personnel could have a material adverse effect upon the Company....
Clerk's Papers, at 319 (cause 55958-9).
On June 5, 1982, 5 days before the placement memorandum went into circulation, Peterson was hospitalized in Spokane where he was diagnosed as having an aneurysm 3 in his brain which had burst and bled. On June 7, 1982 after additional testing, it was discovered Peterson had multiple aneurysms, occurring in both hemispheres in his brain. On June 10, 1982, the day on which the placement memorandum was circulated, Peterson underwent surgery to correct the bleeding aneurysm. All of the directors and Evans Llewellyn were advised of Peterson's bleeding aneurysm before surgery. Perkins Coie was advised by Mason on June 11, 1982. Following surgery, Peterson's doctor advised him that on an elective basis he should within the year undergo a second, similar operation to correct the remaining aneurysms.
Immediately, the question of whether Peterson's health condition and surgery should be disclosed to potential investors in some fashion was discussed. It was decided by Data Line and Perkins Coie that disclosure of Peterson's health problem should be provided to the investors. Perkins Coie documented this decision as follows:
Gary [Morgan] and I have discussed the possibility of Dale writing a letter to all investors on his health in 30 days, or before the closing. This would both provide full information and reassure investors. Let's plan on it.
Clerk's Papers, at 324 (cause 55958-9).
The planned disclosure was never made. Later Perkins Coie changed its recommendation and advised Data Line that disclosure was unnecessary since Peterson's apparent recovery from his surgery and his early return to work made his health condition irrelevant. Perkins Coie made this recommendation relying upon the observations of Morgan and Mason regarding Peterson's apparent recovery from the surgery and upon firsthand observation of Peterson. Neither Perkins Coie nor any of the directors communicated with any of Peterson's treating physicians nor did they request from Peterson a full disclosure of his medical condition. None of the directors, Perkins Coie, or Evans Llewellyn were aware of Peterson's subsisting aneurysms or of the recommendation of Peterson's doctor that he undergo a second brain surgery within the year.
It was not until the middle of October 1982, that Peterson advised the other officers of his decision to undergo a second surgery for the persisting aneurysms. It was only then that the directors became aware of Peterson's additional aneurysms. After Peterson underwent the second surgery, he never effectively resumed his duties and he resigned in April 1983. Data Line made few sales of its products and, in July 1984, the shareholders voted to wind up the corporation's affairs. Data Line's stock is now valueless.
The officers and directors argue that before they can be liable under RCW 21.20.010, 4 the investors must establish that defendants' misrepresentations were the proximate reason for their investments' decline in value. We disagree. The investors need only show that the misrepresentations were material and that they relied on the misrepresentations in connection with the sale of the securities. Findings of Fact 2.24 through 2.32 to which directors have not assigned error and are therefore verities substantiate that each investor relied on statements in the selling materials with respect to the importance of Peterson, the chief executive officer, to the company. Conclusion of law 3.2, to which directors have not assigned error, finds Peterson's health condition after the first surgery to be a material fact.
A plain reading of the State Securities Act demonstrates that a decline in the market value of the stock is not an element of a State Securities Act claim. RCW 21.20.010 makes it unlawful for a seller to make a material misrepresentation or omission in connection with the sale of a security. The violation is in the misrepresentation itself; it is not how the misrepresentation affected the price of the stock. RCW 21.20.430(1) provides rescission as the basic remedy. Thus an investor who is wrongfully induced to purchase a security may recover his investment without any requirement of showing a decline in the value of the stock. We affirm the trial court's finding that investors are not required under the State Securities Act to prove that Peterson's health condition caused the decline in value of Data Line's stock.
Investors contend the outside directors Cline and Zirkle are secondarily liable to them. RCW 21.20.430(3) 5 imposes secondary liability on control persons and directors for a seller's violation of RCW 21.20.010. Conclusion of law 3.8, to which directors have not assigned error, finds Data Line violated the State Securities Act.
This court has not heretofore formulated a test for...
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