Midwest Management Corp. v. Stephens

Decision Date23 April 1980
Docket NumberNo. 62062,62062
Citation291 N.W.2d 896
PartiesBlue Sky L. Rep. P 71,567, Fed. Sec. L. Rep. P 97,608 MIDWEST MANAGEMENT CORPORATION, Appellant, v. Morris STEPHENS, John A. Stephens, Lyman J. Clark, Jr., and Richard K. Hollingsworth, Appellees.
CourtIowa Supreme Court

Richard G. Santi of Ahlers, Cooney, Dorweiler, Haynie & Smith, Des Moines, for appellant.

Robert E. Dreher and James L. Sayre of Dreher, Wilson, Adams & Jensen, Des Moines, for appellee Morris Stephens.

David S. Wiggins of Williams, Hart & LaMarca, West Des Moines, for appellees John A. Stephens, Clark, and Hollingsworth.

Considered by REYNOLDSON, C. J., and LeGRAND, UHLENHOPP, McCORMICK and LARSON, JJ.

UHLENHOPP, Justice.

This appeal requires us to decide whether the trial court properly sustained the defendants' motions for summary judgment in an action for breach of contract based on defendants' failure to perform their part of a stock subscription agreement. We consider both the Iowa and federal law of securities as well as the common law of contracts.

Plaintiff Midwest Management Corporation is an Iowa corporation organized in June 1969. Initially it was an insurer operating through its wholly-owned subsidiary, American Sterling Life Insurance Company. Defendant Morris Stephens (Stephens) served as one of the directors and as chairman of the investment committees of both Midwest and American Sterling from August 12, 1969, until December 31, 1971. Midwest asserts that from July 22, 1970, until December 29, 1971, Stephens also served as chief executive officer of Midwest and American Sterling. Defendants dispute this assertion.

In July 1970, defendants Stephens, John A. Stephens, Lyman J. Clark, Jr., and Richard K. Hollingsworth (we refer to latter three defendants as SC&H) approached Midwest with a plan for a new securities broker-dealer business. Midwest was to provide the initial capital for the new business, and defendants were to manage and operate it. To persuade Midwest to finance the broker-dealer business, defendants emphasized their experience in that field and offered to purchase specific amounts of Midwest's common stock and pay for it over a five-year period.

After negotiations an oral agreement was reached during a meeting of Midwest's board of directors on July 29, 1970. Midwest was to provide $250,000 initial capital for the broker-dealer business to be managed by defendants. In return, Stephens allegedly was to purchase 100,000 shares of Midwest's common stock at $1.50 per share, while SC&H were each to purchase 25,000 shares at the same rate. Stephens denies that he so agreed. Midwest's shareholders approved this "package" later the same day. Although the original plan was for the broker-dealership to operate within Midwest's corporate structure, later the business was operated by a wholly-owned incorporated subsidiary named Hollingsworth, Stephens & Clark.

Pursuant to the agreement, Midwest invested $250,000 in the broker-dealer business and allegedly elected SC&H as the principal officers of Midwest. SC&H deny this allegation. Defendants' stock subscription agreements apparently were not executed until late 1970 or January 1971. At the time the agreements were signed, Stephens allegedly asked that he be allowed to put his own stock subscription contract for 100,000 shares in the name of his son, John A. Stephens. Midwest agreed in return for Stephens' oral promise to stand behind the subscription agreement and see that it was paid. The stock subscription contracts were not registered with the Iowa Insurance Commissioner or the federal Securities and Exchange Commission (SEC).

Defendants managed the broker-dealer business until September 1971, when it failed. Midwest lost its investment of $250,000 in addition to part of a loan of $150,000 it made to the subsidiary after it was incorporated. Defendants refused to pay for the stock under the subscription agreements.

On December 18, 1973, Midwest filed its petition in Polk District Court against SC&H on the subscription agreements they had signed and against Stephens on the subscription agreement he allegedly agreed to stand behind.

Stephens filed an answer and counterclaim. He pleaded eleven affirmative defenses in his answer. SC&H filed answers asserting various affirmative defenses. Both Stephens and SC&H subsequently amended their answers, setting forth additional affirmative defenses.

Defendants subsequently filed motions for summary judgment on seven grounds. Midwest filed a resistance to the motions, accompanied by supporting affidavit. The district court sustained defendants' motions on three grounds: (1) violation of section 502.5(15) of the Iowa Code of 1966 for failure to file a report of sale, (2) violation of section 77e, title 15, United States Code, for failure to file a report of sale, and (3) lack of mutuality of obligation and remedy. (Our code references are to those Iowa and federal codes.)

Midwest asserts that the district court erred both in the standard it applied to defendants' motions and in its sustension of the motions.

I. Who has the burden ? In its ruling on defendants' motions the district court stated: "Since the Motions under consideration were filed under R.C.P. 237, the burden rests on the Plaintiff to demonstrate specific facts showing there is a genuine issue for trial (R.C.P. 237(e)). This ruling is made with the provisions of R.C.P. 237 in mind." Iowa Rule of Civil Procedure 237(e), on which trial court relied, states in pertinent part:

When a motion for summary judgment is made and supported as provided in this rule, an adverse party may not rest upon the mere allegations or denials of his pleading, but his response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial. If he does not so respond, summary judgment, if appropriate, shall be entered against him.

Midwest contends that the court erred because subsection (c) of Rule 237 has been construed by this court to impose on the movant the burden of showing that no issue of material fact exists. See Brody v. Ruby, 267 N.W.2d 902, 904 (Iowa 1978); Unification Church v. Clay Central School District, 253 N.W.2d 579, 581 (Iowa 1977); Meyer v. Nottger, 241 N.W.2d 911, 916 (Iowa 1976).

We agree with Midwest's argument that the court erred in stating that Midwest has the burden. We have considered the interrelationship of subsections (c) and (e) and held that subsection (c) "requires movant to establish by evidentiary matter the absence of a genuine issue and this is so even though no adequate resistance is made." American Telephone & Telegraph Co. v. Dubuque Communications Corp., 231 N.W.2d 12, 14 (Iowa 1975) (citations omitted).

The court's statement regarding the burden does not however prevent us from addressing the substantive issues. The trial court had made a similar statement in Rohlin Construction Co., Inc. v. Lakes, Inc., 252 N.W.2d 403, 406 (Iowa 1977). We stated, id.:

The trial court was wrong in stating the burden was upon the defendants rather than upon plaintiff. However, the trial court's improper statement did not result in error unless the burden was in fact placed on defendants.

The question of whether Rohlin established the absence of any genuine issue of material fact must be determined on the basis of what was before the trial court.

We then proceeded to decide whether the trial court's entry of summary judgment was supported by the record. We follow that procedure here.

The district court had before it (1) Midwest's petition and reply to Stephens' counterclaim, (2) defendants' answers, Stephens' counterclaim, and the motions for summary judgment, (3) Midwest's resistance and affidavit, (4) the exhibits attached to Midwest's petition and affidavit, (5) depositions of several individuals including all defendants and David Stanley, director and chairman of the board of Midwest, (6) answers to interrogatories, and (7) admissions. We will view this material in the light most favorable to Midwest in deciding whether defendants met their burden of showing the absence of a genuine issue of material fact. Drainage District No. 119 v. City of Spencer, 268 N.W.2d 493, 499 (Iowa 1978).

II. Iowa blue sky law. The first ground on which the court sustained defendants' motions was that the stock subscription agreements were violative of section 502.6 of the Iowa Code. That section requires registration with the Iowa Insurance Commissioner of any security sold in Iowa "except securities exempt under section 502.4 or unless sold in any transaction exempt under section 502.5." Section 502.23 of the Code provides that any "contract for sale made in violation of any of the provisions of this chapter shall be voidable at the election of the purchaser . . . ." Midwest does not dispute that the stock subscription agreements on which this action is based are contracts for the sale of securities, nor that the stock covered by the agreements was not registered with the Iowa Insurance Commissioner. Therefore if the subscription agreements are not exempt under section 502.4 or 502.5, defendants would be entitled to rescind the agreements unless they are prevented from doing so by other contentions Midwest makes.

The general purpose of blue sky laws is to protect the public from deceit perpetrated in the sale of securities. See Wagner v. Kelso, 195 Iowa 959, 966, 193 N.W. 1, 4 (1923). Accord, McElfresh v. State, 151 Fla. 140, 144, 9 So.2d 277, 278 (1942); Terrill v. Hoyt, 149 Kan. 51, 58, 87 P.2d 238, 243 (1939). See also, Note, Blue Sky Legislation, 23 Iowa L.Rev. 102, 103-04 (1937). Those laws should be liberally construed to effectuate their purpose. See Wagner, 195 Iowa at 966, 193 N.W. at 4. Accord, McElfresh, 151 Fla. at 144, 9 So.2d at 278; Kerst v. Nelson, 171 Minn. 191, 195, 213 N.W. 904, 905 (1927). If statutory language is susceptible to more than one construction, it should be...

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