Holloway v. Howerdd

• Decision Date: 28 March 1973
• Docket Number: Civ. A. No. 6396.
• Citation: 377 F. Supp. 754
• Parties: C. L. HOLLOWAY and wife Martha J. Holloway v. Eugene HOWERDD et al.
• Court: U.S. District Court — Middle District of Tennessee

377 F. Supp. 754

C. L. HOLLOWAY and wife Martha J. Holloway v. Eugene HOWERDD et al.

Civ. A. No. 6396.

United States District Court, M. D. Tennessee, Nashville Division.

March 28, 1973.

COPYRIGHT MATERIAL OMITTED

C. Allen High, Nashville, Tenn., Wilkes T. Thrasher, Jr., Chattanooga, Tenn., for plaintiffs.

Stanley T. Snodgrass, Nashville, Tenn., George M. Derryberry, Chattanooga, Tenn., for defendants.

MEMORANDUM

MORTON, District Judge.

This case was instituted as a class action against seven defendants alleging violations of §§ 5, 12 and 17 of the Securities Act of 1933 (hereinafter "the Securities Act"), § 10(b) of the Securities Exchange Act of 1934 (hereinafter "the Exchange Act"), and Rule 10b-5 of the Securities and Exchange Commission. A nonsuit was taken as to one defendant, no proof was offered as to the liability of three others, and therefore Eugene Howerdd, Marion S. Lagerquist, and Tennessee Securities Company are the remaining three defendants. Jurisdiction is invoked pursuant to 15 U.S.C. §§ 77v and 78aa.

The plaintiffs' theory is that the defendants, acting individually and in concert, sold securities in a corporation known as Modular Properties, Inc. (hereinafter "Modular"), a Georgia corporation, in violation of the above enumerated statutory and regulatory provisions.

FACTS

Prior to February 23, 1970, William B. Baumstark, Shell E. Heartley, Frank R. Holzers, Jesse J. Richardson, and Claude D. Crosby agreed to enter into a business of manufacturing and promoting the sale of modular buildings. Their concept was to form a corporation with its principal office in Atlanta, Georgia, and to capitalize it through the sale of stock within Georgia. On February 23, 1970, for and on behalf of the promoters, an agreement was entered into with Planned Financial Corporation (hereinafter "PFC"), represented by defendant Lagerquist, which provided for the sale by that organization of preincorporation and post-incorporation stock under § J of the Securities Act of Georgia to 25 individuals. PFC was to receive a 15 per cent commission of the total funds raised and 250,000 shares of the stock, known as "penny a share" stock, which was to be charged against the 15 per cent commission total.

On March 24, 1970, Modular was incorporated under the laws of the State of Georgia. The initial Board of Directors consisted of the five individuals heretofore named: Baumstark, Heartley, Holzers, Richardson and Crosby. On March 25, 1970, Crosby was elected president and Baumstark secretary-treasurer. Prior to the alleged illegal acts asserted by plaintiffs, however, Heartley and Richardson resigned from the Board. PFC managed to sell some stock of Modular prior to its incorporation, but afterwards was unable to sell post-incorporation stock.

Following its inception, Modular purchased a small plant in Monroe, Georgia, which became engaged primarily in the development of modular units, although some sales were undertaken from this plant.

In May, 1970, Lagerquist, representing PFC, learned that Howerdd was interested in selling Yetter Homes, a corporation of which he was the sole stockholder. Lagerquist arranged a meeting of Crosby and Howerdd to negotiate the sale of Yetter Homes to Modular. On July 16, 1970, an agreement of intent was executed between Yetter Homes, PFC and Modular whereby PFC would attempt to market and sell stock of Yetter Homes and Modular in sufficient quantities to enable Yetter Homes to repay a loan from Howerdd plus the value of the inventory, cash on hand, and accounts receivable. Modular would then own Yetter Homes outright. The plan called for Howerdd to become a director of Modular, and in accordance with the agreement he purchased 250,000 shares of Modular stock for $2,500. By letter of July 20, 1970, Howerdd explained this transaction to his accountant, and attached a list of individuals who might be interested in buying the stock provided for in the agreement of intent. A copy of this list was sent to PFC which unsuccessfully endeavored to make stock sales to those individuals residing in Georgia.

In August, 1970, without Howerdd's knowledge, Modular's Board of Directors, consisting of Baumstark, Crosby and Holzers, authorized negotiations with Attorney Raymond A. Prater and others in Chattanooga, Tennessee, to exchange Modular stock for that of Beaver Hamburger Systems.

By letters of August 31, 1970, and September 9, 1970, Crosby, president of Modular, enumerated to Howerdd changes he considered desirable in the operating procedures for Yetter Homes and recommended changes in its plant in Savannah, Georgia. In response to a telephone communication on September 11, 1970, Howerdd went to the Monroe plant where he and Crosby rescinded the letter of intent by which Yetter Homes and Modular were to be merged. By letter of September 14, 1970, Howerdd confirmed the cancellation agreement to Crosby and also notified PFC. Howerdd further related that he could not accept Crosby's offer to be a director of Modular. PFC thereafter took no additional steps to attempt to sell any stock for Modular or Yetter Homes, and had no further connection with Modular prior to its complete financial collapse.

On September 17, 1970, Modular, without the knowledge of Howerdd, Lagerquist, PFC or any of its employees, agreed with Prater to acquire through stock exchange Beaver Hamburger Systems.

In October, 1970, H. Royce Mitchell, an employee of Modular, prepared a brochure showing that Howerdd was a director of Modular Management, Inc., a proposed firm which never came into existence. On November 4, 1970, Howerdd and Crosby attended a meeting in Jackson, Mississippi, of contractors interested in mass production of residences. On this occasion Howerdd saw for the first time the brochure prepared in October, 1970, and advised Crosby that he was not a director of Modular Management. It was later revealed that a number of these brochures were distributed in Tennessee and North Carolina without Howerdd's knowledge. Further reference will be made to these brochures hereinafter.

On November 23, 1970, Crosby, representing Modular, notified PFC in writing that any and all agreements between them were cancelled and that arrangements to acquire funding for Modular were being made elsewhere. On the same day Crosby fired his previously employed attorneys in Atlanta, Georgia.

Also in November, 1970, Prater, having become actively involved in the affairs of Modular, contacted Wilburn Tucker, a registered representative of Tennessee Securities, Inc., a stock brokerage concern in Nashville, Tennessee, about buying stock in Modular. Prater represented to Tucker that Howerdd was a director of Modular and also a substantial stockholder in Georgia Pacific Company. He stated that the stock being sold was unregistered, and that stock certificates issued to him could be held or assigned to Tucker, but that they would not be negotiated through the normal stock endorsement method. In this "piggy-back" arrangement, stock would be issued to Prater and held for the benefit of Tucker. Thereafter, Tucker purchased and sold stock to various investors in Tennessee under this piggy-back arrangement. All of this stock had been issued in the name of Prater and was never delivered to the ultimate purchasers.

Some time after November, 1970, Modular acquired a plant for the production of its product in Martinsville, Virginia.

In April, 1971, Baumstark, the secretary-treasurer of Modular, contacted Howerdd at his home in North Carolina. Howerdd had previously requested that he be refunded the $2,500 which he had paid for a subscription of stock in Modular. This stock, which Howerdd had subscribed for at the time of executing the letter of intent to merge Yetter Homes with Modular, had never been issued to him. Baumstark told Howerdd on this date in April, 1971, that the stock had somehow been allocated to Howerdd on the books of Modular and that certain stock powers were required to "get it off the books." Baumstark told Howerdd that the stock would be allocated or disposed of "to the boys." Howerdd executed some fifty stock powers in blank, and although his testimony in this instance is rather indefinite, he asserted that his understanding was that the stock would be divided among the other directors of the company. Thereafter, on May 17, 1971, twelve Modular stock certificates indicating ownership in Howerdd were transferred to individuals in North Carolina by the use of the stock powers which Howerdd had signed in blank for Baumstark. The stock certificates were signed by Baumstark as an officer of Modular.

On May 28, 1971, Crosby and Prater were killed in a plane crash. In response to a telephone call, Howerdd agreed to go to Martinsville, Virginia, to see if any of Modular's inventory could be used by Yetter Homes. He was advised that Modular was in desperate financial straits, and needed to quickly dispose of some assets in order to raise cash for a payroll and delinquent taxes due the Internal Revenue Service. On June 1, 1971, Howerdd went to Martinsville, and agreed to act temporarily as a director of Modular to see what could be salvaged. In a meeting of Baumstark, Troy Beaver and Howerdd, Beaver was elected to the Board as secretary. Minutes of the meeting, dated June 4, 1971, were signed by Howerdd, Beaver and Baumstark as directors. In addition, they signed a form resolution to Virginia National Bank relative to Modular's bank account and loans.

On June 7, 1971, after Howerdd had returned to North Carolina, he discovered a $203 check which had been left at his home by Baumstark. This check was in payment of stock sold by Baumstark in North Carolina utilizing a stock power signed by Howerdd. Howerdd sent the check to Modular denying any interest therein or any prior knowledge of the sale.

In June, 1971, it became obvious that Modular was in dire financial difficulty and stockholder meetings were held in Chattanooga and...