Johns Hopkins University v. Hutton

• Decision Date: 04 December 1973
• Docket Number: No. 72-1995.,72-1995.
• Citation: 488 F.2d 912
• Parties: The JOHNS HOPKINS UNIVERSITY, Appellee, v. William E. HUTTON et al., Appellants.
• Court: U.S. Court of Appeals — Fourth Circuit

488 F.2d 912 (1973)

The JOHNS HOPKINS UNIVERSITY, Appellee, v. William E. HUTTON et al., Appellants.

No. 72-1995.

United States Court of Appeals, Fourth Circuit.

Argued February 5, 1973.

Decided December 4, 1973.

Certiorari Denied April 1, 1974.

John A. Wilson, New York City (Michael J. DeSantis, Lawrence G. Golde, John F. King and Shearman & Sterling, New York City, on brief), for appellants.

John Henry Lewin and Edmund P. Dandridge, Jr., Baltimore, Md. (Venable, Baetjer & Howard, Baltimore, Md., on brief), for appellee.

Before RUSSELL and FIELD, Circuit Judges, and BRYAN, District Judge.

Certiorari Denied April 1, 1974. See 94 S.Ct. 1622, 1623.

FIELD, Circuit Judge:

In this case which was before us over three years ago, W. E. Hutton & Company ("Hutton") now appeals from a summary judgment of rescission in favor of the plaintiff, The Johns Hopkins University ("Hopkins"), granted on counts II, III and V of Hopkins' amended complaint. Based upon the charge that Hutton's employee, Gilbert H. LaPiere, had been guilty of misrepresentations and nondisclosure incident to Hopkins' purchase of an oil and gas production payment from Trice Production Company, Hopkins' amended complaint was framed in seven counts: (I) Section 12(2) of the Securities Act of 1933¹; (II) Section 10(b) of the Securities Exchange Act of 1934² and Rule 10b-3 of the Securities and Exchange Commission³; (III) Section 10(b) of the '34 Act and Rule 10b-5 of the Commission⁴; (IV) Section 15(c) (1) of the '34 Act⁵; (V) Section 17(a) of the '33 Act⁶; and (VI) and (VII) under the common law for (a) false representation and fraudulent conduct and (b) false representations negligently made with reckless indifference as to their truth.

On the former appeal⁷ we had occasion to review the action of the district court in granting Hopkins' motion for summary judgment on count I involving the alleged violation of Section 12(2) of the '33 Act. In our disposition of that appeal we found the production payment to be a "security" within the statutory definition of the '33 Act and further concluded that the undisputed facts warranted the summary finding that Hutton's violation of Section 12(2) of the '33 Act entitled Hopkins to rescission. However, we noted the presence of a material factual controversy upon the issue as to whether Hopkins had commenced its action within "one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence" as required by Section 13 of the '33 Act.⁸ We held that since Hutton had demanded a jury and the facts were susceptible of conflicting inferences on the issue of Hopkins' reasonable diligence, the issue under Section 13 should be submitted to a jury. To that end we remanded the case to the district court for further proceedings consistent with our opinion.

Upon remand, for some reason not at all clear to us, the district court did not proceed with the jury trial on the Section 13 issue under Count I. Instead, the court permitted Hopkins to press its claim for summary judgment as to liability only under counts II, III, and V of the complaint which were bottomed on Section 10(b) of the '34 Act and Section 17(a) of the '33 Act. Discerning support in our affirmance of facial liability under Section 12(2) on the former appeal, the district judge in an opinion filed in April of 1971 found that the undisputed facts sufficiently demonstrated the presence of the requisite elements of scienter and reliance and granted summary judgment in favor of Hopkins with regard to liability under the three counts in question.⁹

We think the undisputed facts support the district court's summary finding of liability upon counts II, III and V. While our opinion on the former appeal was addressed only to the Section 12(2) claim, the undisputed evidence of LaPiere's misrepresentations and omissions to which we referred on that occasion would clearly supply the element of scienter necessary to support a cause of action under Sections 10(b) and 17. Reliance, of course, is not an operative element under the Section 12(2) count and we were not called upon to make a specific evaluation on that point in our former opinion. While the case of Affiliated Ute Citizens v. United States, 406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972) has cast some doubt upon the part played by reliance in Rule 10b-5 cases, we do not find it necessary to concern ourselves with the dialogue of whether some degree of reliance is still a factor in face-to-face transactions involving misrepresentations and nondisclosure such as we presently have before us.¹⁰ On the prior appeal we stated that "information about future revenues was essential to Hopkins' decision to purchase, and this information was tainted by LaPiere's material misrepresentations and omissions," and assuming that in a case such as this some degree of reliance is necessary, we think the essentiality of the tainted information satisfies the accepted criteria of reliance which were delineated in List v. Fashion Park, Inc., 340 F.2d 457 (2 Cir. 1965). See Baumel v. Rosen, 283 F.Supp. 128, 140 (D.C.Md.1968), reversed on other grounds 412 F.2d 571 (4 Cir. 1969).

Having found Hopkins entitled to summary judgment with respect to liability, the district court proceeded to discuss at some length the nature of the relief to which Hopkins might be entitled. While at this juncture Hopkins had asked only for damages under counts II, III and V, the district judge explored the possibility of rescission and, adverting to our opinion in Baumel v. Rosen, 412 F.2d 571 (4 Cir. 1969), concluded that to obtain such relief "Hopkins must succeed at trial in establishing by the preponderance of the evidence that it demanded rescission `within a reasonable time after discovery of the ground for rescission.'" The district judge determined that there was a triable issue of fact under count I relative to the Section 13 limitation issue, and also such a triable issue with respect to Hopkins' entitlement to rescission under counts II, III and V as to "whether Hopkins moved too slowly in its quest for rescission." As heretofore noted, Hopkins at that time had not asked for rescission with respect to counts II, III and V, and in the concluding paragraph of the opinion the district judge offered Hopkins the following options:

"Hopkins is hereby required to inform this Court and Hutton within fourteen (14) days from the date of this opinion (a) whether Hopkins is primarily seeking rescission under one or more of Counts I, II, III and V and/or any other count, and, secondarily, damages under one or more of Counts II-VII, inclusive, only if Hopkins is held not entitled to rescission under any count; or (b) whether Hopkins desires to opt for damages and forego its quest for rescission; or (c) whether Hopkins asks that the pending discovery and evidentiary questions, all of which apparently pertain entirely to damages, be determined by this Court before Hopkins makes the election posed by (a) and (b)."¹¹

Responsive to this invitation, Hopkins advised the court by letter on April 20, 1971, that it was "primarily seeking rescission under counts II, III and V of the Complaint; secondly, rescission under count I; and damages under counts II, III and V only if Hopkins is not entitled to rescission under counts I, II, III and V." Some months thereafter, on January 7, 1972, with leave of the court, Hopkins filed an amendment to its complaint seeking, in addition to its demand for damages, relief by way of rescission on counts II through VII. The court also permitted Hutton to file an amendment to its answer alleging that Hopkins had failed to act with reasonable diligence in asserting rescission promptly and, additionally, was guilty of laches.¹² In its final opinion filed in March of 1972,¹³ the district court reaffirmed its earlier conclusion that Hutton was "entitled to a jury trial in connection with any and all triable fact issues with regard to whether Hopkins is entitled to rescission (a) under Counts II, III and V in which Hopkins seeks relief pursuant to Section 10(b) of the Securities and Exchange Act of 1934 and Rules 10b-3 and 10b-5 promulgated thereunder, and also pursuant to Section 17(a) of the Securities Act of 1933, and/or (b) under Count I in which Hopkins seeks relief under Section 12(2) of the Securities Act of 1933, so long as Hopkins continues to hold in reserve, in the event Hopkins is held not entitled to rescission, its claim for damages under one or more Counts II-VII, inclusive, of Hopkins' complaint."¹⁴

The Court, and we think properly, recognized this right of Hutton to a jury trial under the rationale of Ross v. Bernhard, 396 U.S. 531, 90 S.Ct. 733, 24 L.Ed.2d 729 (1970); Dairy Queen v. Wood, 369 U.S. 469, 82 S.Ct. 894, 8 L.Ed.2d 44 (1962); and Beacon Theatres, Inc. v. Westover, 359 U.S. 500, 79 S.Ct. 948, 3 L.Ed.2d 988 (1959). However, having recognized Hutton's theoretical right to a jury trial on these issues, the district judge concluded "that upon the current state of the record in this case and the undisputed facts disclosed by it," Hopkins was entitled to a summary grant of rescissory relief under counts II, III and V. In reaching this conclusion the district judge took the position that Hopkins' conduct in seeking rescission under Sections 10(b) and 17 should be appraised under criteria substantially different from those imposed by Section 12(2) and the related Section 13 requirement. Recognizing that the one year limitation under Section 13 is tested to a large degree upon an objective standard of reasonable diligence on the part of the buyer in making discovery of the fraud, the district court suggested that in the context of the 10(b) and 17 claims a subjective test should be applied and that Hutton had the burden of proving that Hopkins had actual notice of the fraud substantially in advance of the date on which it...