Loveridge v. Dreagoux

• Decision Date: 18 May 1982
• Docket Number: No. 80-1660,80-1660
• Citation: 678 F.2d 870
• Parties: Fed. Sec. L. Rep. P 98,680 Dale B. LOVERIDGE and Owen W. Johnson, Plaintiffs-Appellees, v. Verne E. DREAGOUX, Archie D. Burton, Max Hogan, Everett Dahl, Defendants-Appellants.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 870

678 F.2d 870

Fed. Sec. L. Rep. P 98,680

Dale B. LOVERIDGE and Owen W. Johnson, Plaintiffs-Appellees, v. Verne E. DREAGOUX, Archie D. Burton, Max Hogan, Everett Dahl, Defendants-Appellants.

No. 80-1660.

United States Court of Appeals Tenth Circuit.

May 18, 1982.

David E. Leta, Roe & Fowler, Salt Lake City, Utah (Gary F. Kennedy, Roe & Fowler, Salt Lake City, Utah, with him on the brief), for plaintiffs-appellees.

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

Lambertus Jansen, Salt Lake City, Utah, filed a brief on behalf of defendant-appellant Verne E. Dreagoux.

Before SETH, BARRETT and DOYLE, Circuit Judges.

WILLIAM E. DOYLE, Circuit Judge.

The above named defendants were named as defendants in an action for damages brought by the plaintiffs Loveridge and Johnson for damages which allegedly resulted from the violation of § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 issued thereunder. In separate counts the defendants were also charged with breach of contract. Defendant Dreagoux was adjudged in violation of § 10(b) and Rule 10b-5. Burton and Dahl were found to be in breach of contract in accordance with Utah Code Ann. § 16-10-139. The three defendants were found to be jointly and severally liable to each plaintiff for $5,000 plus 6% interest per annum. Burton and Dahl were additionally found to be jointly and severally liable to each plaintiff for $2,000 in attorneys fees and 7% interest per year on each $5,000 debenture, which represents the remainder of the interest agreed upon for the debentures, 15% per annum.

The sale of the debentures in question occurred on April 23rd, 1971, at which time Johnson purchased a 15% serial debenture from Am-Phil, Inc. Plaintiff Loveridge purchased an identical debenture from Am-Phil on April 28, 1971. Each was in the face amount of $5,000 and bore interest at the rate of 15% per annum and fell due on May 1, 1973. Each of the debentures was represented as one of twenty such debentures of an authorized issue of $100,000 which Am-Phil, Inc., purportedly a corporation of the State of Nevada, had issued. Am-Phil was not, in truth, incorporated under the laws of Nevada until April 29, 1971, one day after plaintiff Loveridge purchased his debenture and five days after Johnson purchased his. Each debenture was signed by the defendants Burton and Dahl in their capacities as president and secretary of Am-Phil. The plaintiffs purchased debentures 19 and 20, the last numbered debentures in the series. At that time only one other debenture had been sold and none were sold thereafter.

The plaintiffs had been directed to the availability of the Am-Phil debentures by their broker. Plaintiffs met separately with defendant Verne Dreagoux, an incorporator and later director of Am-Phil. Dreagoux indicated to the plaintiffs that this was a joint venture concept to import commodities from the Philippines through a Philippine corporation called La Mancha, which was to provide raw materials. Am-Phil was to be responsible for the transportation of these materials to the United States and Rondeau Pacifica, Inc. was to carry out the marketing and promotion of the business.

The $15,000 from the debentures was exhausted without the corporation ever engaging in the intended business. As a result the plaintiffs failed to be paid on the debentures when they came due on May 1, 1973. Soon thereafter they instituted this suit to recover their investment. Am-Phil has no assets and filed no answer to the complaint in the trial court and judgment was granted against it.

On appeal the defendant Dreagoux contends:

1. That the use of the telephone to make intrastate calls did not satisfy the Interstate Commerce requirement of § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.

2. That the trial court erred in admitting evidence of the date on which the Articles of Incorporation of Rondeau Pacifica, Inc. and Am-Phil, Inc. were filed and thereby disregarded the facts stipulated in the pre-trial order.

3. That plaintiffs' claims are barred by the Utah three year statute of limitations.

4. That the trial court made no finding that Dreagoux had the requisite scienter so as to satisfy Rule 10b-5.

On behalf of defendants Burton and Dahl it is contended that:

1. The trial court did not have jurisdiction over the pendent state law claim for breach of contract.

2. The trial court erred in applying § 16-10-139 of the Utah Business Corporation Act to the defendants Burton and Dahl inasmuch as Am-Phil was a Nevada corporation, not a Utah one.

3. The trial court erred in finding the defendants guilty of violating § 16-10-139 of the Utah Business Corporations Act when this specific statute as a theory of liability was not contained in the pleadings in express terms.

I. The Dreagoux Contentions

Reliance upon intrastate telephone calls to confer jurisdiction under § 10(b) and Rule 10b-5.

The trial court found that the defendant made representations to the plaintiffs in connection with the sale of the debentures which were violative of § 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78J(b)) and Rule 10b-5 of the Rules of the Securities and Exchange Commission. (17 C.F.R. § 240 10b-5).

The first contact which the defendant had with each of the plaintiffs was by phone. The defendant contends that these intrastate calls are not sufficient to satisfy the jurisdictional requirement of the Securities and Exchange Act in that an instrumentality of interstate commerce must be used in connection with the alleged deception. We conclude that this argument lacks merit. Kerbs v. Fall River Industries, Inc., 502 F.2d 731 (10th Cir. 1974). In this case we specifically held that proof of intrastate telephonic messages in connection with the employment of deceptive devices or contrivances is sufficient to confer jurisdiction in a § 10(b) and Rule 10b-5 action. Accord Alley v. Miramon, 614 F.2d 1372 (5th Cir. 1980). This court's decision in Kerbs, supra, settled the issue for this circuit. In that case this court said:

both intrastate and interstate telephone communications are part of an aggregate telephonic system as a whole. Cf. Lipinski v. United States, 251 F.2d 53, 56 (10th Cir. 1958). And as long as the instrumentality itself is an integral part of an interstate system, Congress has power, when necessary for the protection of interstate commerce to include intrastate activities within its regulatory control. See Weiss v. United States, 308 U.S. 321, 60 S.Ct. 269, 84 L.Ed. 298 (1939); NLRB v. Jones and Laughlin Steel Corp., 301 U.S. 1, 57 S.Ct. 615, 81 L.Ed. 893 (1936). Accordingly, we hold that proof of intrastate telephonic messages in connection with the employment of deceptive devices or contrivances is sufficient to confer jurisdiction in a 10(b) and Rule 10b-5 action. * * * " Id. at 738.

The trial court's admission of evidence of the date on which the Articles of Incorporation of Rondeau Pacifica, Inc. and Am-Phil, Inc. were filed.

The defendant takes the position that although the plaintiffs were persuaded to believe a false statement as to the date on which the Articles of Incorporation of the corporations were filed, the fact stipulated binds the plaintiff even though admittedly false. We are unable to accept such a contention. True, the pre-trial court order refers to the corporate status of Am-Phil. Section 3 entitled "uncontroverted facts", states that at the time the complaint was filed, "defendant Am-Phil, Inc. was a Nevada corporation engaging in the business of promoting and developing commercial markets and trading in the far east in association with its parent corporation, Rondeau Pacifica, Ltd."

However, as of the time of trial there was evidence establishing the true fact that the Articles of Incorporation for Am-Phil were not filed with the Secretary of State of Nevada until April 29, 1971. This was used by the court as evidence to show that at the time the debentures were sold, that is April 23rd and 28th respectively, Am-Phil was not a de jure corporation, as represented by the defendant. The defendant argues that the trial court erred in admitting this evidence because it is contrary to the uncontested facts in the pre-trial order. However, the true fact is that the Articles of Incorporation were not filed at the time of sale stated in the pre-trial order. However, this court is not obligated to perpetuate a known misstatement. The pretrial order only says that Am-Phil was a Nevada corporation at the time the complaint was filed. This was a contested issue of fact and the court ruled against the defendant. It found that Am-Phil did not come into existence until the Articles of Incorporation were filed, that is on April 29, 1971.

The applicable Utah statute of limitations.

The statute in question, Utah Code Ann. § 78-12-26(3) (1953) provides that an action for relief on the ground of fraud or mistake has to be brought within three years but that the cause of action in such case shall not be deemed to have accrued "until the discovery by the aggrieved party of the facts constituting the fraud or mistake." Applying that statute to the case before the court, it is to be concluded that the statute of limitations did not run on the injury here in question. Surely the part of the statute which says that it shall not start to run until the discovery by the aggrieved party of the facts constituting the fraud is pertinent here. This construction is in accord with the opinions of this court that have found the Utah Statute of Limitations to apply to actions brought pursuant to § 10(b) and 10b-5 of the Act. Clegg v. Conk, 507 F.2d 1351, 1353 n.5 (10th Cir. 1974); Richardson v. MacArthur, 451 F.2d 35 (10th Cir. 1971); Mitchell v. Texas Gulf Sulphur Company, 446 F.2d 90 (10th Cir. 1971).

The defendant's argument is that at the time of the purchase, the plaintiffs were put on notice that the security in question was subject to...