Mosher v. Kane

• Citation: 784 F.2d 1385
• Decision Date: 17 March 1986
• Docket Number: No. 84-6318,84-6318
• Parties: Fed. Sec. L. Rep. P 92,518 Robert E. MOSHER and William W. Martin, individually and on behalf of all other persons similarly situated, Plaintiffs-Appellants, v. William Everett KANE and Barbara Jean Kelly, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 1385

784 F.2d 1385

Fed. Sec. L. Rep. P 92,518

Robert E. MOSHER and William W. Martin, individually and on behalf of all other persons similarly situated, Plaintiffs-Appellants, v. William Everett KANE and Barbara Jean Kelly, Defendants-Appellees.

No. 84-6318.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Dec. 4, 1985.

Decided March 17, 1986.

Richard L. Noble, Stephen W. Holohan, Los Angeles, Cal., for plaintiffs-appellants.

Michael L. Thornburg, Louis M. Meisinger, Hill, Wynne, Troop & Meisinger, Los Angeles, Cal., for defendants-appellees.

Appeal from the United States District Court for the Central District of California.

Before BARNES, GOODWIN and BOOCHEVER, Circuit Judges.

BARNES, Senior Circuit Judge:

Robert E. Mosher ("Mosher") and William W. Martin ("Martin") appeal from the district court's dismissal of their complaint for failure to state a claim upon which relief can be granted, under Fed.R.Civ.P. 12(b)(6). We have jurisdiction under 28 U.S.C. Sec. 1291 and we reverse the dismissal of this action.

I. FACTS

The basic facts underlying the filing of this action have been set forth in the related appeal, In re A & C Properties, 784 F.2d 1377 (9th Cir.1986), and need not be repeated herein. However, we review briefly the procedural factors which led to the dismissal of this action.

Martin and Mosher filed this action ¹ in the United States District Court on August 28, 1981. They alleged that K & K, William Everett Kane ("Kane") and Barbara Jean Kelly ("Kelly") violated various sections of the federal securities law when exchanging stock in K & K for the assets of A & C Properties and that material misrepresentations were made when K & K filed with the SEC, a registration statement, consisting of a prospectus and proxy solicitation. Appellants argue that these misrepresentations violated: (1) Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated thereunder; (2) Section 14(a) of the Securities and Exchange Act of 1934 and Rule 14a-9 promulgated thereunder; and (3) Section 17(a) of the Securities Act of 1933. The appellants filed an amended complaint on December 11, 1981.

Thereafter, motions to dismiss were filed by the defendants, and the district court determined on hearing the motions to dismiss, that appellants had not stated a claim upon which relief could be granted. The Court dismissed the first amended complaint, without leave to amend, pursuant to Fed.R.Civ.P. 12(b)(6), on August 16, 1984. Appellants timely appeal this dismissal.

II. DISCUSSION

Appellants raise several issues to be decided on review:

1. Whether the complaint alleges sufficient facts to state a claim for relief under Section 10(b) of the Securities and Exchange Act of 1934 (15 U.S.C. Sec. 78j(b)), and Rule 10b-5 promulgated thereunder;

2. Whether the complaint alleges sufficient facts to state a claim for relief under Section 14(a) of the Securities and Exchange Act of 1934 (15 U.S.C. Sec. 78n), and Rule 14a-9 promulgated thereunder;

3. Whether there exists an implied private right of action under Section 17(a) of the Securities Act of 1933 (15 U.S.C. Sec. 77q(a)), and if so, whether the complaint alleges sufficient facts to state a claim for relief thereunder;

4. Whether a common law action for fraud on the court may be maintained where the only pleaded jurisdictional basis is one of federal question and violation of federal law;

5. Whether the district court abused its discretion in refusing to allow plaintiffs to file amended complaints and in dismissing the action.

A. Standard of Review.

On a motion to dismiss for failure to state a claim, a complaint is liberally construed in the plaintiff's favor, generally taking as true all material facts alleged in the complaint. Rosen v. Walters, 719 F.2d 1422, 1424 (9th Cir.1983). Further, a complaint should not be dismissed under this rule " 'unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.' " Ernest W. Hahn, Inc. v. Codding, 615 F.2d 830, 834 (9th Cir.1980) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 99, 101-102, 2 L.Ed.2d 80 (1957)). The sufficiency of a complaint is a question of law which we review de novo. United States v. McConney, 728 F.2d 1195, 1201 (9th Cir.) (en banc), cert. denied, --- U.S. ----, 105 S.Ct. 101, 83 L.Ed.2d 46 (1984).

B. Section 10(b) and Rule 10b-5 Claims.

When considering a Section 10(b) ² and Rule 10b-5 ³ claim for relief, the court should liberally construe that claim in order to effectuate the policies underlying the federal securities laws. Securities Investor Protection Corp. v. Vigman, 764 F.2d 1309, 1313 (9th Cir.1985). Appellants argue that their Section 10(b) and Rule 10b-5 claims arose (1) out of the 1977 compromise, (2) from the creation of the ESOT, ⁴ (3) out of K & K's false and misleading registration statement, and (4) as a result of the alleged "forced sale" which occurred when the rights to the shares of K & K stock which they benefically owned were transferred to the trustee.

The district court dismissed appellants' complaint on the basis that they did not have standing to sue. In order for a private plaintiff to have standing to bring an action under Section 10(b) or Rule 10b-5, the plaintiff must have been a purchaser or seller of the securities. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 731, 95 S.Ct. 1917, 1923, 44 L.Ed.2d 539 (1975); Birnbaum v. Newport Steel Corp., 193 F.2d 461, 463 (2d Cir.), cert. denied, 343 U.S. 956, 72 S.Ct. 1051, 96 L.Ed. 1356 (1952). However, a contract to purchase or sell securities satisfies this standing requirement. Blue Chip Stamps, 421 U.S. at 750-51, 95 S.Ct. at 1932. Appellants present three arguments in support of a finding that a contract for a purchase and sale existed.

1977 Compromise.

Appellants first argue that the 1977 Compromise constituted a contract for purchase and sale of securities because it provided for the issuance of K & K stock to appellants in exchange for the surrender of certain rights by appellants. The district court rejected this argument, finding that although appellants had entered into a final unconditional contract, they were neither purchasers or sellers, but allegedly beneficial owners.

The 1977 Compromise provided for appellees to cede stock to K & K, in exchange for the release by appellants of legal actions they might have against the appellees. Since a purchase or sale of stock by a corporation is not deemed to be a purchase or sale by the corporation's shareholders, see, e.g., Rathborne v. Rathborne, 683 F.2d 914, 919 (5th Cir.1982), appellants do not have standing to allege a violation under the 1977 Compromise.

Plan of Arrangement.

Although no actual purchase or sale was ever consummated, the plan of arrangement which was prepared and approved by the shareholders in accordance with the 1977 Compromise provided for distribution of stock to appellants. Thus, under the "aborted purchaser-seller doctrine," ⁵ appellants have standing under the Plan to allege violations of Section 10(b) and Rule 10b-5. See Mount Clemens Industries, Inc. v. Bell, 464 F.2d 339, 345 (9th Cir.1972).

The district court found that the Plan did not become final, since it required the approval of the bankruptcy court. The court found, therefore, that no executory contract existed and appellants failed to meet the purchase or sale requirement required by the Securities and Exchange Act. See Northland Capital Corp. v. Silver, 735 F.2d 1421, 1427-30 (D.C.Cir.1984) (no binding agreement and therefore no sale exists where disputes remain concerning actual required final documentation with respect to a contract which has been approved by both sides).

Nonetheless, although the Plan was never approved by the bankruptcy court, it was in fact one of the conditions of the 1977 Compromise, which the district court found to be an executed contract. Furthermore, the registration statement, including the prospectus and proxy solicitation, which was filed with the SEC was also a condition of the 1977 Compromise. Appellants alleged in their complaint that the fraud perpetrated by appellees was due to the statements and misrepresentations which appeared in the registration statement, and that appellees' fraud induced appellants to vote to approve the Plan. They further argue that it was this fraud which prevented the bankruptcy court from approving the Plan. Thus, the Plan was an executed contract whereby performance was allegedly frustrated by the appellees' fraud. There was a contractual relationship between the parties, and the transaction was allegedly aborted as a result of the fraud of the defendants. Mount Clemens Industries, Inc. v. Bell, 464 F.2d 339, 345 (9th Cir.1972). This contractual relationship elevated appellants to the status of statutory purchasers, see Mount Clemens, 464 F.2d at 345, thereby satisfying the purchaser requirement under the securities act. See, e.g., Davis v. Davis, 526 F.2d 1286, 1289 (5th Cir.1976).

Forced Sale Doctrine.

Appellants also argue that the transfer to the trustee of the shares in K & K which they owned beneficially constituted a "forced sale," thereby qualifying them as sellers under the 1934 Securities and Exchange Act. We reject this argument.

The forced sale doctrine was first recognized in Vine v. Beneficial Finance Co., 374 F.2d 627 (2d Cir.1967), cert. denied, 389 U.S. 970, 88 S.Ct. 463, 19 L.Ed.2d 460 (1967), and has been adopted by the Ninth Circuit. See Shivers v. Amerco, 670 F.2d 826, 830 (9th Cir.1982).

In essence, the doctrine provides that where a defendant is engaged in a scheme for the purpose of forcing the plaintiffs to convert their shares for money or other consideration, such acts by the defendant allow a plaintiff standing to sue under the securities act. See Landy v. Federal Deposit Insurance Corp., 486 F.2d 139, 158-59 (3rd Cir.1973), cert. denied,...