Johns Hopkins University v. Hutton

• Decision Date: 12 April 1971
• Docket Number: Civ. No. 15098.
• Citation: 326 F. Supp. 250
• Parties: The JOHNS HOPKINS UNIVERSITY v. James M. HUTTON, Jr., et al.
• Court: U.S. District Court — District of Maryland

326 F. Supp. 250

The JOHNS HOPKINS UNIVERSITY v. James M. HUTTON, Jr., et al.

Civ. No. 15098.

United States District Court, D. Maryland.

April 12, 1971.

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John Henry Lewin, Edmund P. Dandridge, Jr., and Venable, Beatjer & Howard, Baltimore, Md., for plaintiff.

John A. Wilson, Michael J. DeSantis and Shearman & Sterling, New York City, and John F. King, Baltimore, Md., for defendants.

FRANK A. KAUFMAN, District Judge.

This seven count action was instituted by Hopkins in 1963. Five years later, after protracted and extensive discovery had been engaged in by both sides, this Court granted Hopkins' motion for summary judgment under the first count stated by Hopkins pursuant to Section 12(2) of the Securities Act of 1933 (the '33 Act). Johns Hopkins University v. Hutton, 297 F.Supp. 1165 (D.Md.1968). The Fourth Circuit, on appeal, held that "genuine issues of material fact precluded the entry of summary judgment on the issue raised by Hutton's plea of the statute of limitations" but that "on all other issues, the district court correctly entered summary judgment for Hopkins." Johns Hopkins University v. Hutton, 422 F.2d 1124, 1126 (4th Cir. 1970).¹ Accordingly, the Fourth Circuit "affirmed in part, reversed in part, and remanded for further proceedings consistent with its opinion." 422 F.2d, supra at 1132.

In its earlier opinion, this Court wrote (297 F.Supp., supra at 1172-1173):

Hopkins' amended complaint is set forth in seven counts: (1) Section 12(2) of the '33 Act; (2) Section 10(b) of the '34 Act and Rule 10b-3 of the Securities and Exchange Commission (S.E.C.); (3) Section 10(b) of the '34 Act and Rule 10b-5 of the S.E.C.; (4) Section 15(c) (1) of the '34 Act; (5) Section 17(a) of the '33 Act; and (6) and (7) under the common law for (a) false representation and fraudulent conduct and (b) making false representations negligently and with reckless indifference as to their truth.

Hopkins' motion for summary judgment was presented with regard to each of the first five or statutory counts. Near the close of his rebuttal, during oral argument on Hopkins' motion for summary judgment, Hopkins' counsel stated that if the Section 12(2) equitable relief sought by Hopkins under count one of the amended complaint should be granted, Hopkins would consider itself fully satisfied (Tr. 458-463). Therefore, since summary judgment will be granted to Hopkins under count one, the issues raised by the other counts are moot. Footnote omitted.

Following the remand of this case by the Fourth Circuit to this Court, Hopkins pressed its claims for summary judgment, as to liability only, under the second,² third,³ and fifth counts.⁴

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Additionally, both sides have presented their respective contentions concerning standards applicable in connection with the determination of damages under one or more of the counts.⁵

Further, Hopkins has also filed motions to strike Hutton's demand for a jury trial under Count I (the Section 12(2) count) and to sever that count for separate trial.

While the earlier opinions in this case of the Fourth Circuit and of this Court were written in the context of Hopkins' Section 12(2) summary judgment motion, and not in the context of Hopkins' current 10b-3, 10b-5 and 17(a) motions, the underlying findings of fact previously made by this Court and approved by the Fourth Circuit provide the factual underpinnings for determination of those issues which are raised by Hopkins' pending summary judgment motions. After review and reconsideration of the record to date, this Court declines, as suggested by Hutton, to revise, and also declines, as suggested by Hopkins, to amplify, any of its earlier factual determinations.

I. SECTIONS 10(b) AND 17(a)

The elements of the three counts, brought under 10(b) and 17(a), are almost identical. Many of those elements are also substantially similar to comparable elements in the 12(2) cause of action. Thus, Hutton violated Rules 10b-3 and 10b-5 and Section 10(b) of the '34 Act, and Section 17(a) of the '33 Act, if, as a broker,⁶ Hutton, by use of the mails or any means or instrumentality of interstate commerce, knowingly, in connection with the sale⁷ of a security to Hopkins, made an untrue statement of material fact, and, knowingly, in that connection, omitted to state a material fact necessary in order to render the statements Hutton made not misleading under the circumstances in which the statements were made, and Hopkins, in ignorance of the truth, relied upon misleading information furnished to it by Hutton or relied upon the information in fact furnished by Hutton not knowing of the omitted material information. The findings and holdings of the Fourth Circuit and of this Court in the earlier opinions have established that the production payment sold to Hopkins was a security;⁸ that Hutton is responsible for LaPiere's misrepresentations and omissions (297 F.Supp., supra at 1209-1213, 1236-1237; 422 F.2d, supra at 1130); that LaPiere did make material misrepresentations and omitted to furnish Hopkins with material information LaPiere possessed (297 F.Supp., supra at 1217-1218; 422 F.2d, supra at 1128-1129); that the mails or facilities of interstate commerce were used by LaPiere in connection therewith (297 F.Supp., supra at 1213-1214; 422 F.2d, supra at 1128); that Hopkins is a type of investor entitled to protection under the federal securities laws (297 F.Supp., supra at 1217); and that Hopkins did not have knowledge of LaPiere's material misstatements and material omissions prior to the consummation of Hopkins' purchase of the production payment (297 F.Supp., supra at 1220-1222; 422 F.2d, supra at 1129).

A. SCIENTER

This Court repeats its refusal to find, in the current summary judgment context of this case, that LaPiere acted "as an evil man," 297 F.Supp., supra at 1198, n. 20, but also repeats its conclusion (at 297 F.Supp., supra at 1219-1220) that a—

* * * buyer under Section 12(2) does not have to prove that the seller had a subjectively evil state of mind in making false statements or omissions. Further, in order to avoid liability, if all of the other elements of a 12(2) cause of action exist, a seller must show that he did not know of the misstatements or omissions, or could not have known of them, in the exercise of reasonable care. * * *

The standards of 12(2) are clear when it comes to ascertaining whether LaPiere's conduct is actionable. What did LaPiere know? What could he have known in the exercise of reasonable care? The undisputed facts speak loudly and clearly as to what information LaPiere had in his possession. There is no evidence in the record that LaPiere did not have, or that it would be possible to prove that he did not have, such information in his possession and that LaPiere did not know and could not have known with the exercise of reasonable diligence that he made material misstatements and material omissions in his communications to Hopkins. * * * Citations omitted.

Under Section 12(2) of the '33 Act, the burden is upon the defendant to prove that "he did not know, and in the exercise of reasonable care could not have known" of the false or misleading nature of the misstatement or omission upon which liability under that section is alleged. In actions under Sections 10(b) of the '34 Act and 17(a) of the '33 Act, the element of scienter must be proved by the plaintiff. Sitting by designation in this Court as a District Judge in Baumel v. Rosen, 283 F.Supp. 128 (D.Md.1968), aff'd in part, rev'd in part, 412 F.2d 571 (4th Cir. 1969),⁹ cert. denied, 396 U.S. 1037, 90 S.Ct. 681, 24 L.Ed.2d 681 (1970), Judge Winter noted (at 139):

* * * Numerous authorities have discussed the quantum of proof to sustain a cause of action under Rule 10b-5 and how a cause of action under Rule 10b-5 differs from a cause of action for common law fraud. * * *

After reviewing the authorities, Judge Winter concluded (at 140):

* * * In the view of the Court, Rule 10b-5 should be so construed to give effect to its remedial purpose and the remedial purpose of the Act under which it was adopted. S. E. C. v. Capital Gains Research Bureau, 375 U.S. 180, 195, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963). It follows that proof of common law fraud is not required to sustain a cause of action under Rule 10b-5.

In Globus v. Law Research Service, Inc., 418 F.2d 1276, 1290 (2d Cir. 1969), cert. denied, 397 U.S. 913, 90 S.Ct. 913, 25 L. Ed.2d 93 (1970), a case involving both 10b-5 and 17(a), the Second Circuit, in approving the District Court's jury charge, wrote:

The jury was told that before the appellants could be held liable to plaintiffs, it must conclude that appellants "knew the statement was misleading or knew of the existence of facts which, if disclosed, would have shown it to be misleading." The trial court thus shared the view often advanced in this circuit that some form of scienter greater than mere negligence was required in order to permit plaintiffs to recover damages in a private action under 17(a) or 10(b). * * * But the trial judge refused to direct the jury that it must find appellants intended to defraud appellees before it determined that there was a violation of either of those sections.

The necessity of some intent to defraud or scienter has been the subject of much debate. * * * But the trend is clearly away from enforcing a scienter requirement equal to the "intent to defraud" required for common law fraud. Before there may be a violation of the securities acts there need not be present all of the same elements essential to a common law fraud, * * *. Emphasis supplied; citations omitted.

See also S. E. C. v. Texas Gulf Sulphur Co., 401 F.2d 833, 854-855 (2d Cir. 1968); Myzel v. Fields, 386 F.2d 718, 734-735 (8th Cir. 1967), cert. denied, 390 U.S. 951, 88 S.Ct. 1043, 19 L.Ed.2d 1143 (1968); and Kohler v. Kohler, 319 F.2d 634, 637 (7th Cir. 1963), where it was held that Section 10(b)—

* * * was

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