INVESTORS THRIFT CORPORATION v. Sexton
| Decision Date | 04 February 1974 |
| Docket Number | 73-1141 and 73-1165.,No. 73-1117,73-1117 |
| Citation | 491 F.2d 768 |
| Parties | INVESTORS THRIFT CORPORATION, Appellant, v. Sam SEXTON, Jr., et al., Appellees and Cross-Appellants. |
| Court | U.S. Court of Appeals — Eighth Circuit |
William M. Stocks, Fort Smith, Ark., for Investors.
Philip S. Anderson, Little Rock, Ark., for James Hall.
Don A. Smith, Fort Smith, Ark., for Gatlin.
Before HEANEY, ROSS and STEPHENSON, Circuit Judges.
Rehearings and Rehearings En Banc Denied March 12, 1974.
Investors Thrift Corporation (ITC) appeals from an adverse jury verdict in a case wherein ITC was the plaintiff and Sam Sexton, Jr., James S. Hall, and Josephine W. Ramey, Administratrix of the estate of Austin Gatlin, were defendants.
After protracted litigation refined the issues,1 the jury, in this case, was asked to decide whether the defendants, by fraudulent misrepresentations, induced the plaintiff to purchase all of the stock in American Home Builders, Inc. (AHB). AHB controlled a number of other companies including Peoples Loan and Investment Company (PL&I). Essentially, ITC contended that the defendants had falsely misrepresented the value of AHB's stock and the value of AHB and PL&I. Maurice Markham, ITC's president, was the moving force behind ITC's acquisition of AHB and PL&I. ITC acquired an option to purchase these companies in early September of 1965, and the option was exercised in early November of 1965.
ITC asserts, among numerous other grounds allegedly requiring reversal, that it was unfairly prejudiced by the trial court's Instruction 12 relating to "time of loss" and by the admission of certain evidence relating to "time of loss." Finding these arguments to be meritorious, we reverse and remand for a new trial.2
Instruction 12.
The district court instructed the jury that:
(Emphasis supplied.)
In Instruction 13, the court instructed that: "Ordinarily the plaintiff would be entitled to recover the difference between the actual value of the stock at the time the option to purchase was exercised, and the price the defendants actually received for the stock. . . ." (Emphasis supplied.)
Objection is made to Instruction 12 on the grounds that it improperly focuses the jury's attention on the wrong point in time in determining the value of the stock, and, in addition, incorrectly states, in essence, that if ITC aggravated its losses it is not entitled to any damages, regardless of the fact that some portion of the damages may have come about as the proximate cause of the fraud, and not the aggravation of the initial loss.
It is clear that Arkansas requires, as do most jurisdictions, that value be determined as of the time of the sale of the stock.3 McDonough v. Williams, 77 Ark. 261, 92 S.W. 783, 786 (1905). See generally, H. McGregor, McGregor on Damages § 1366 at 911-912 (1972). C. McCormick, McCormick on Damages § 122 at 455-458 (1935); 4 J. Sutherland, A Treatise on the Law of Damages § 1172 at 4408-4409 (1916). Therefore, to the extent Instruction 12 focused the jury's attention on a time subsequent to the sale of the stock, the instruction was erroneous.
We think it clear that Instruction 12, speaking as it did of "loss in the operation," tended to focus the jury's attention, for the purpose of determining value, on a time subsequent to the sale of the stock. Although Instruction 13 properly defined the time for determining the value of the stock, the jury could have been confused by the qualifying words of Instruction 12. In effect, Instruction 12 indicates that if the jury does find an operations loss, but the operations loss was not the product of the fraud, then the jury is directed to find for the defendants. Thus, even if the companies were essentially worthless at the time the stock was sold, subsequent aggravation of the financial plight of the corporations by the plaintiff would preclude recovery for loss sustained at the time of the sale. While it may have been proper to tell the jury that the plaintiff was not entitled to recover for operations losses sustained for reasons other than the alleged fraudulent misrepresentation, it was improper to tell the jury that operations losses not caused by the fraud precluded recovery even if the companies were essentially worthless at the time of sale.
Due to the massive amount of evidence which tended to relate to mismanagement subsequent to the sale of the stock, and which tended to demonstrate that mismanagement of the companies caused certain operations losses, Instruction 12 is not harmless. We turn next to that evidence of subsequent mismanagement.
Subsequent Mismanagement.
The defendants, over ITC's strenuous and continued objection, introduced a great deal of evidence relative to the mismanagement of the companies after they had been acquired by ITC. ITC contends that this evidence, in conjunction with Instruction 12, was designed to mislead the jury. Specifically, it said that the evidence was introduced to direct the jury's attention to the cause of "operations" losses. ITC argues that the cause of the operations losses was irrelevant, since under Arkansas law the value of the stock was to be determined as of the time of sale. In response, the defendants contend that the evidence established that the businesses were financially sound at the time of sale.4
The evidence to which ITC takes objection and which related to times subsequent to the purchase of the stock may be summarized briefly as follows: disbursement of PL&I loan reserves to AHB; an extremely complicated transaction between the Richmond Life Insurance Company, the Community National Life Insurance Company, John Haldi, Maurice Markham and PL&I (the Haldi deal); PL&I's acquisition of California real estate and the subsequent trade of this property for an interest in Amco Industries of Chicago (Amco deal); PL&I's bankruptcy and the circumstances surrounding the bankruptcy. The net thrust of all this evidence was that ITC, principally through Markham, had grievously mismanaged AHB and PL&I after ITC had acquired the companies.
The primary question to be answered is whether mismanagement of AHB and PL&I in 1967 tends to prove that these companies were valuable in late 1965. There is no contention that ITC was claiming recovery for losses sustained after the sale of stock. Indeed by objection to the defendants' opening argument, by continued objection during trial, by objection to the court's instructions, by proposed instruction, and by closing argument, ITC contended that "everything that happened after the dates of this sale and after all of the money had been paid . . . is completely irrelevant . . .."
Defense counsel replied:
All of these matters that transpired after Mr. Markham took over are introduced not only for laches and estoppel but also going to the creditability (sic) of Mr. Markham.
In closing argument, defense counsel further explained why this evidence of subsequent mismanagement was presented:
Even assuming that evidence of subsequent mismanagement may, in some circumstances, be used to prove value at the time of sale, it is undisputed that there must be some reason to link the subsequent mismanagement with the value of the stock at the time of sale. Thus in a case where a purchase of bank stock was attacked by the buyer for fraud, one court has said:
The trial court should be careful to admit only competent testimony tending to show the value of the assets at the time of the exchange.
Rardon v. Davis, 52 S.W.2d 193, 195 (Mo.App.1932) (emphasis in original), cited with approval in 12A W. Fletcher, Fletcher Cyclopedia of Corporations § 5601 at 182, 183 n.4 (Wolf ed. 1972). The party offering evidence of subsequent mismanagement would be required to demonstrate a link between the subsequent mismanagement and value of the stock at the time of sale. As graphically demonstrated by defense counsels' trial statements explaining why this evidence was offered, no such link between subsequent mismanagement and value at the time of sale was established.
No case has been called to our attention which equates subsequent mismanagement with intrinsic worth at the time of the sale. The closest case we have been able to find is Smith v. Reynolds, 94 Vt. 28, 108 A. 697, 703 (1920). In that case the Vermont Supreme Court held that it was...
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