Holmes v. Bateson
| Decision Date | 28 August 1978 |
| Docket Number | Nos. 77-1484,s. 77-1484 |
| Citation | 583 F.2d 542 |
| Parties | Fed. Sec. L. Rep. P 96,532 Elizabeth D. HOLMES and Industrial National Bank of Rhode Island, as Executors of the Estate of Howard W. Holmes, Plaintiffs-Appellees, v. Harold BATESON and Gordon Bronson, Individually and Under the Trade Name andStyle of Charles A. Maguire and Associates, and C. E. Maguire, Inc. andCombustion Engineering, Inc., Defendants-Appellants. to 77-1486. |
| Court | U.S. Court of Appeals — First Circuit |
W. Foster Wollen, New York City, with whom Thomas M. Geisler, Jr., Shearman & Sterling, New York City, Joseph V. Cavanagh and Higgins, Cavanagh & Cooney, Providence, R. I., were on brief, for appellant C. E. Maguire, Inc.
Gerald Gillerman, Boston, Mass., with whom Jill W. Landsberg, Widett, Widett, Slater & Goldman, P. C., Paul M. Siskind, John M. Reed, Jeremiah F. Healy, III, Withington, Cross, Park & Groden, Boston, Mass., George M. Vetter, Hinckley, Allen, Salisbury & Parsons, and G. Chandler Beals, Providence, R. I., were on brief, for appellants Harold Bateson and Gordon Bronson.
Bernard Bressler, New York City, with whom Alan D. Plotkin, Bressler, Lipsitz & Rothenberg, New York City, Richard M. Borod and Edwards & Angell, Providence, R. I., were on brief, for appellees.
Before COFFIN, Chief Judge, CAMPBELL and BOWNES, Circuit Judges.
This appeal arises from claims brought under the Securities Exchange Act of 1934, section 10(b), 15 U.S.C. § 78j(b), and Securities Exchange Commission Rule 10b-5, to obtain compensatory damages for the sales of securities allegedly induced by appellants in violation of the Act and the rules promulgated pursuant to it. 1 An action for The district court found that the estate of Howard W. Holmes had been defrauded of over two million dollars by the action of defendants Bateson and Bronson and Maguire corporation. Most of the underlying facts are undisputed, though they are characterized differently and the differences between the inferences drawn from them are vast.
fraud was also brought under Rhode Island law. Specifically, it was alleged that appellants "willfully participated in a scheme and plan and in acts and practices designed to communicate false and misleading information about the condition, status, affairs and prospects of the (Maguire) Corporation and Partnership so as to cause the sale by plaintiffs of the Holmes shares of the Corporation . . . ." Appellants contend that the district court's misinterpretation of financial statements coupled with a misunderstanding of the underlying transactions resulted in clearly erroneous findings. They also contend that the action was barred by the statute of limitations. Appellant Maguire Corporation appeals a finding of corporate liability based on the actions of its former principals, Gordon Bronson and Harold Bateson. The amount of damages assessed by the district court is contested by all appellants.
Charles A. Maguire and Associates, an engineering firm headquartered in Providence, Rhode Island, since 1942, was operated as a partnership for most of its existence. In the spring of 1968, it was conducted by four partners: Milton E. Nelson, Holmes, Bronson, and Bateson. 2 Holmes joined the firm in 1950 and became a partner in 1952. Bronson joined Maguire in 1953 and became a partner in 1960. Bateson also became a partner in 1960. Ralph Neff was employed as Maguire's accountant since 1944. John Coffey was employed as Maguire's attorney since the late 1940's and visited Maguire almost every working day. Coffey was a close friend of the Holmeses and represented Mrs. Holmes after her husband died. The Industrial National Bank of Rhode Island was Maguire's principal lender and the institution chosen by Holmes to administer his estate. Henry F. Tingley, Jr. was in charge of the bank's commercial loan department and responsible for the Maguire account. He had been familiar with the Maguire operations since the late 1940's. Evandro Radoccia, an attorney and head of the bank's Estate Settlement Division, was appointed to act on the bank's behalf as co-executor with Mrs. Elizabeth Holmes. Edward Long and Kenneth Rawlinson of the bank's Trust Department were also involved at different times on the bank's behalf in its capacity as co-executor. Mrs. Holmes was co-executor of the estate, but she relied completely on the advice of Coffey whom she had known since childhood. She had not been involved in the business during her husband's life. Maguire, Bateson, and Bronson were represented by Attorney Robert Picard in matters dealing with Holmes's estate since Coffey represented the estate.
Maguire was principally engaged in the design and construction supervision of highways, bridges, and sanitary projects and providing related consulting services. In 1967, the business experienced growing pains, and the partners retained the management consultant firm of Booz, Allen and Hamilton (Booz, Allen) to analyze the firm's organizational problems and make recommendations for its future operation. The The report described a healthy and rapidly expanding firm whose financial reporting and accounting method were inadequate to reflect its true earnings. One of the primary criticisms was the company's use of cash basis accounting which, because it did not match fees earned with expenses incurred, was particularly inappropriate for a service organization such as Maguire. The bank was also unhappy with the cash basis accounting method.
partners and Coffey received a report from Booz, Allen in December, 1967.
In the spring of 1968, based largely on recommendations contained in the Booz, Allen report, a decision was made to incorporate, effective January 1, 1969. The partnership was retained to facilitate liquidating the assets in a tax advantageous manner. The corporation was to complete pending contracts and to conduct all new business after December 31, 1968. Accounts receivable, retainages, and rights to payment for work performed before December 31, 1968, were retained by the partnership. The Maguire partners were to individually transfer their interests in certain partnership assets to the corporation in December 31, 1968, in exchange for the issuance of 850 shares of common stock: 350 shares for Holmes and 250 each for Bateson and Bronson. The partnership assets transferred included the right to perform new contracts and complete work in progress. Cash receipts were to be collected by the partnership and would be reportable as personal income for the partners.
The three shareholders of the corporation filed an election under Subchapter S of the Internal Revenue Code so that the tax attributes of the corporation would be reportable on their individual tax returns. This allowed the partners to offset their income with the expenses incurred by the corporation. The partners also transferred cash receipts from the partnership to the corporation as loans to the corporation from the individual partners in proportion to their interests in the corporation. This was the principal mechanism by which the corporation obtained working capital. Since the partnership was dependent on accounts receivable for its supply of cash, the funds were transferred as received rather than in one lump sum. Neff, the accountant, was in charge of this procedure.
Holmes's active participation in the business declined, due to an addiction to alcohol, prior to his death on April 9, 1969. There is no evidence that he actively participated in or had knowledge of any of the merger or acquisition attempts.
In February, 1969, Bronson contacted Michael Cantor, a broker for companies seeking merger or acquisition. Cantor put Bronson in touch with the Barry Wright Corporation. Coffey was called in to help negotiate Cantor's fees.
On March 26, 1969, at the end of the first quarter of the corporation's operation, the first annual meeting was held. 3 Coffey, Picard, Holmes, Bronson and Bateson were present. Cash basis profits of $498,000 were reported by Bronson as Treasurer, and Coffey, prepared a press release which indicated that the company had gross receipts of 6.6 million dollars, an increase of approximately 15% Over the previous year. Despite the company's profitability, it had cash flow problems as a result of its rapid growth and because expenses were incurred and payable long before accounts could be billed.
At the March meeting, Bronson also reported that a final settlement had been reached with former partner Nelson. Nelson was to receive $400,000 for his 26% Interest in the partnership. Coffey advised the stockholders that, since they had now formed a corporation, they should agree on some method of determining the value of the stock in the event of death. Holmes When Holmes died on April 9, 1969, he owned a 46% Interest in the partnership and 350 shares, or 41.7% Of the corporation's capital stock. He had loaned the corporation a total of $244,000. After Holmes's death, Bateson became President of Maguire, and he and Bronson became the sole directors.
Bateson, and Bronson agreed, according to Coffey, "that should anything happen to any one of them, until such agreement was entered into, that the determination of the value of the deceased or withdrawing or discharged partner would be as if they were still a partnership." There was a buy out provision in the partnership agreement specifically providing the method and time period for payment of a deceased partner's share of the business. 4
There is little doubt that Coffey, Bronson, and Bateson all acted under the impression that the remaining partners would buy the estate's interest in Maguire, both the partnership and the corporation, as if the business were still a partnership. Coffey's understanding was that the estate's interest would be bought out by...
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