Kemmerer v. Weaver, 18640.

• Decision Date: 22 June 1971
• Docket Number: No. 18640.,18640.
• Citation: 445 F.2d 76
• Parties: Harold KEMMERER et al., Plaintiffs-Appellees, v. Mark L. WEAVER et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

445 F.2d 76 (1971)

Harold KEMMERER et al., Plaintiffs-Appellees, v. Mark L. WEAVER et al., Defendants-Appellants.

No. 18640.

United States Court of Appeals, Seventh Circuit.

June 22, 1971.

Everett E. Dahl, Midvale, Utah, for defendants-appellants.

Ronald A. Gullstrand, Aurora, Ill., for plaintiffs-appellees.

Before DUFFY, Senior Circuit Judge, and CUMMINGS and KERNER, Circuit Judges.

DUFFY, Senior Circuit Judge.

This suit was brought under the Securities and Exchange Act of 1933 (Title 15 U.S.C. § 77a et seq.) and the Securities and Exchange Act of 1934 (Title 15 U.S.C. § 78j) and Rule 10B-5 promulgated pursuant thereto (17 C.F.R. § 240.10B-5). Plaintiffs claimed defendants offered for sale certain investment contracts wherein there was not a full, complete and fair disclosure of all the material facts.

Plaintiffs filed their complaint against the individual defendants together with defendant Weavers' Beaver Association, an agricultural cooperative, and American-Canadian Beavers Company, Inc., a Utah corporation, alleging that the plaintiffs were sold their investment contracts involving live, breeding beaver as a result of certain material misrepresentations and omissions upon which the plaintiffs relied.

Plaintiffs allege that by virtue of the individual defendants' control of the Association, and the direction of the said Association, the individual appellants were liable to plaintiffs for having violated Rule 10B-5.

The trial court made findings of fact and conclusions of law and entered judgment holding that the Beaver contracts were investment contracts as defined by Section 3(a) (10) of the Securities and Exchange Act of 1934, and that material misrepresentations and omissions of fact were made in the sale of these securities to plaintiffs.

Defendants Mark Weaver, Ted Weaver, Van Weaver, Elizabeth Weaver Milligan, Jerry Milligan and Sally Weaver were judged to be liable to plaintiff Harold Kemmerer in the amount of $50,675.00 and to plaintiff Gordon Gregory in the amount of $9,300.00. Defendants Mark Weaver and Lawrence Milligan were judged to be liable to plaintiff Robert Albrecht in the amount of $12,200.00.

The record herein is voluminous consisting of five volumes of transcript plus many exhibits. A summary discloses that the Weavers' Beaver Association was organized as a Utah non-profit agricultural cooperative in 1957. Until late in 1964, the Weaver family had a majority of the directors of the Association. The Court dismissed this Association for lack of jurisdiction in that service of process had never been obtained. The trial court also found that defendant, American-Canadian Beaver Co., Inc., had no liability to plaintiffs and held that the individual appellants were the controlling persons of Weavers' Beaver Association.

The investment contracts were for the sale, care and resale of domestic breeding beaver which were claimed to have a large value in the fur industry. Defendants sold these beaver to plaintiffs and others for prices up to $1200 each, representing that they were seventh generation domestic beaver, and further, representing that there existed a ready market for the resale of these animals.

Pursuant to the terms of the agreement, defendants were to have complete control in the care and feeding of the beaver, and were to select an appropriate market for resale. Due to the hoped for reproduction of the beaver, a 100% return within one year was guaranteed.

Instead of selling exclusively domestic beaver, defendants actually sold to plaintiffs and others, certain wild-trapped beaver which ranged in actual market value of from $20 to $75 each. Furthermore, there was no immediate market for resale as had been promised by defendants. Many purchasers were placed upon a one-year waiting list.

The appellants claim that there are four principal issues on this appeal: 1) Can defendants be charged with liability as controlling persons? 2) Is Lawrence Milligan a controlling person? 3) Is the sale of live beaver under the contracts a "security" under the Act of 1934? and 4) Were there material misrepresentations? Appellants contend that all of these questions should be answered in the negative. We disagree on all four points.

Defendants' first argument is that since Weavers' Beaver Association (Association) was found "not liable", the individual defendants should likewise be held not liable due to the wording of 15 U.S.C. § 78t(a).¹ In other words, defendants contend that if the agent Association is not liable, then the principal (individual defendants) likewise cannot be liable. We disagree.

The premise of this argument is that there is a finding of "no liability" with respect to the Weavers' Beaver Association. No such finding exists, it appearing instead that the Association was dismissed from the suit for lack of jurisdiction due to a failure to obtain service of process. It further appears that the reason for the failure to obtain process was that the Association had been dissolved on the initiative of many of the individual defendants in the present suit. On such facts it is evident that 15 U.S.C. § 78t(a) is of no avail to defendants.

The plaintiffs argue correctly that there is nothing in the statutes or regulations which prohibits the suing of the principal controlling party or parties under 15 U.S.C. § 78j(b) or Rule 10B-5 if the facts in the case so present themselves. The trial court found such facts were present and permitted the action to continue against the controlling party under Rule 10B-5. We hold that the trial judge correctly held that these individual defendants could be liable as controlling persons.

Appellants' second contention that it was clearly erroneous for the trial court to have found Lawrence Milligan to be a controlling person, is also without merit.² The record amply supports such a finding. Although not an officer or director at the time of the events in question, Lawrence Milligan was General Sales Manager of the Association and was shown to have prepared the dissemination of new sales literature through the United States mails. Although Milligan contended at trial that other salesmen of the Association were "independent contractors" he admitted that he told all of these people what to say, what literature to use, and that he had "helped" to put together a film on the Association which was shown to plaintiff Albrecht in this...