McCown v. Heidler

• Decision Date: 22 December 1975
• Docket Number: Nos. 74--1755,74--1756,s. 74--1755
• Citation: 527 F.2d 204
• Parties: Leslie W. McCOWN et al., Plaintiffs-Appellants, v. James W. HEIDLER et al., Defendants-Appellees. Leslie W. McCOWN et al., Plaintiffs-Appellees, v. Joseph C. CALDWELL et al., Defendants-Cross-Appellants.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 204

527 F.2d 204

Leslie W. McCOWN et al., Plaintiffs-Appellants, v. James W. HEIDLER et al., Defendants-Appellees.

Leslie W. McCOWN et al., Plaintiffs-Appellees, v. Joseph C. CALDWELL et al., Defendants-Cross-Appellants.

Nos. 74--1755, 74--1756.

United States Court of Appeals

Tenth Circuit.

Dec. 22, 1975.

Frederic Dorwart, Tulsa, Okl., for appellants.

James C. Lang, Tulsa, Okl., for appellee-cross-appellant, Joseph C. Caldwell.

Hawley C. Kerr and Paul P. McBride, Tulsa, Okl., for other appellees and cross-appellants (Fred S. Nelson, Brian S. Gaskill, Irvine E. Ungerman, Robert S. Rizley and William D. Hunt, Tulsa, Okl., on the briefs for appellees-cross-appellants).

Before Mr. Justice CLARK, ^* LEWIS, Chief Judge, and HILL, Circuit judge.

LEWIS, Chief Judge.

The plaintiffs, purporting to represent a class of land purchasers, brought suit against the defendants alleging common-law fraud and violations of the Interstate Land Sales Full Disclosure Act, 15 U.S.C. § 1701 et seq. The defendants were officers and members of the board of directors of Timberlake, Inc. or Heidler Corporation, the parent corporation.

The plaintiffs purchased lots in Timberlake, a large real estate development promoted by Heidler Corporation and Timberlake, Inc. The developers were obligated to include a large lake, 18-hole golf course, swimming pools, clubhouse, roads, etc. Subsequent to the sales to plaintiffs, both Timberlake, Inc. and Heidler Corporation were adjudicated bankrupt by the district court and receivers were appointed.

The plaintiffs alleged that the two corporations and individual defendants knowingly misrepresented their corporate capacity to complete the development obligations, which misrepresentations operated as a fraud and deceit on lot purchasers in violation of the Interstate Land Sales Full Disclosure Act (Land Act), 15 U.S.C. § 1709(b)(1). The plaintiffs alleged that the Statement of Record and Property Report filed by defendants pursuant to the requirements of the Land Act contained omissions and untrue statements of material facts in violation of 15 U.S.C. §§ 1709(a), (b)(2). The defendants were also alleged to have committed common-law fraud. Subsequently, the plaintiffs filed an Application for Leave to Amend Complaint to allege defendants' violation of the Securities Act of 1933 and the Securities and Exchange Act of 1934 (Securities Acts) and Oklahoma securities laws.

The defendants individually filed motions resisting plaintiffs' certification as a class. Defendants requested dismissal for failure to state a claim upon which relief could be granted, lack of diversity or federal question jurisdiction and failure to join indispensable parties, Heidler Corporation and Timberlake, Inc. Subsequently, the defendants also objected to plaintiffs' attempts to amend their complaint to allege security law violations.

Defendants Larkin Bailey, Paul V. Hartman and Jerald M. Schuman moved that the court enter summary judgment in their favor; the plaintiffs asked the court for summary judgment against those same defendants. The court confronted with the plaintiffs' complaint, plaintiffs' request for class certification and plaintiffs' motion for leave to amend and with defendants' motions to dismiss and with motions for summary judgment as to defendants Bailey, Hartman and Schuman entered an order granting summary judgment for all defendants and dismissing plaintiffs' action.

The trial court in granting the benefits of summary judgment to the defendants under the Land Act held that the undisputed facts indicated that defendants were neither developers (Timberlake and Heidler corporations) nor selling agents but were simply officers or directors of the corporate developer. In so doing the trial court interpreted 15 U.S.C. § 1701:

(4) 'developer' means any person who, directly or indirectly, sells or leases, or offers to sell or lease, or advertises for sale or lease any lots in a subdivision;

(5) 'agent' means any person who represents, or acts for or on behalf of, a developer in selling or leasing, or offering to sell or lease, any lot or lots in a subdivision; but shall not include any attorney at law whose representation of another person consists solely of rendering legal services;

as limiting liability under the Land Act to the two extremities of most complex land development enterprises. The court noted the absence of a 'common control' provision in the Land Act and concluded that Congress intended this Act to have a very limited 'target of suit.' We conclude that the court erred in imposing such narrow limits to liability under the Act.

As Mr. Chief Justice Burger recently observed, new areas of fraud are being constantly conceived, one of which is fraud 'connected with the burgeoning sale of undeveloped real estate, until Congress could examine the problems of the land sales industry and pass into law the Interstate Land Sales Full Disclosure Act.' United States v. Maze, 414 U.S. 395, 406, 94 S.Ct. 645, 651, 38 L.Ed.2d 603 (dictum in dissenting opinion). The general purpose of the Land Act was, of course, to prohibit and punish fraud in such land development enterprises as we here consider and the Act should be interpreted to attain that end. Such an act should be construed 'not technically and restrictively, but flexibly to effectuate its remedial purposes.' SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 195, 84 S.Ct. 275, 285, 11 L.Ed.2d 237. The 'developer' of a land sale plan is usually a corporate entity which, in a fraudulent scheme as here alleged, ends up defunct and offers no reserve for recovery to those persons defrauded; so, too, the end selling agent, when the development collapses financially, is often long gone or cannot respond pecuniarily. Indeed the actual selling agent may well be a creditor of the developer and an indirect victim of the fraud himself. The basic protection of the Act, to be meaningful, must be leveled against the fraudulent planners and profit makers for otherwise the Act would be pragmatically barren. No legislative enactment should be rendered ineffective to attain its purpose if such a construction can be avoided. SEC v. C. M. Joiner Leasing Corp., 321 U.S. 344, 350--51, 64 S.Ct. 120, 88 L.Ed. 88.

The fact that Congress rejected a proposed amendment which would have added a controlling persons clause is not dispositive evidence that the legislature intended to restrict liability to 'selling agents.' It should be noted that directors and officers are routinely held liable under the Securities Act apart from the controlling person clause. E.g., Kerbs v. Fall River Industries, Inc., 10 Cir., 502 F.2d 731. In any event directors and officers who participate with a corporation or its 'selling agents' in fraud in violation of the Land Act are guilty of aiding and abetting. This court has specifically recognized the civil liability of an aider and abettor under the securities antifraud provisions in Kerbs v. Fall River Industries, Inc.:

Under § 10(b) and Rule 10b--5 knowing assistance of or participation in a fraudulent scheme gives rise to liability equal to that of the perpetrators themselves. . . . Moreover, one who aids and abets a fraudulent scheme may be held accountable even though his assistance consists of mere silence or inaction.

502 F.2d 731, 740 (citations omitted).

We hold, therefore, that plaintiffs' alleged cause of action may properly be leveled against the individual defendants in this case be they officers, directors, or participating planners. Such a construction of the Act, although not specifically so stated, seems to have been taken for granted by other courts, for numerous courts have entertained action under the Act leveled at 'controlling stockholders, officers and directors.' Adolphus v. Zebelman, 8 Cir., 486 F.2d 1323, 1325. See e.g., Kamm v. California City Development Co., 9 Cir., 509 F.2d 205, 206; Siebert v. Great Northern Development Co., 5 Cir., 494 F.2d 510; United States v. Del Rio Springs, Inc., D.Ariz., 392 F.Supp. 226; United States v. Pocono International Corp., S.D.N.Y., 378 F.Supp. 1265.

It follows that the trial court's refusal to exercise pendent jurisdiction over the nonfederal cause of action for common-law fraud, while not erroneous in light of that court's disposition of the federal complaint, should now be reconsidered.

The trial court rejected plaintiffs' efforts to amend the complaint to allege a cause of action under the Securities Acts terming the effort to be 'wholly without merit.' The trial court in so holding noted that real property and land purchase contracts are not securities as defined in 15 U.S.C. § 77b(1). We agree that land, as such, is not a security and that a land purchase contract, simply because the purchaser expects or hopes that the value of the land purchased will increase, does not fall automatically within the confines of the Securities Acts. However, we do not agree that land or its purchase necessarily negates the application of the Securities Acts.

The Securities Act of 1933 and the Securities and Exchange Act of 1934 specifically include 'investment contracts' within the definition of 'security.' 15 U.S.C. §§ 77b(1), 78c(a)(10). In SEC v. W. J. Howey Co., the Supreme Court set forth a broad definition of 'investment contract':

The test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others.

328 U.S. 293, 301, 66 S.Ct. 1100, 1104, 90 L.Ed. 1244. This definition of an investment contract can include interests in real property. SEC v. C. M. Joiner Leasing Corp., 320 U.S. 344, 64 S.Ct. 120, 88 L.Ed. 88; Andrews v. Blue, 10 Cir., 489 F.2d 367, 374--75; Gilbert v. Nixon, 10 Cir., 429 F.2d 348, 354. A federal district court has held that a cause of action for fraud under the Securities Acts and the Land Act exists against the promoter of recreational or investment lots. Tober v. Charnita,...