Nicewarner v. Bleavins, Civ. A. No. 8715.

• Decision Date: 04 August 1965
• Docket Number: Civ. A. No. 8715.
• Citation: 244 F. Supp. 261
• Parties: Lloyd E. NICEWARNER, Sr., and Amelia J. Nicewarner, Plaintiffs, v. C. J. BLEAVINS and Thomas K. Hudson, Defendants.
• Court: U.S. District Court — District of Colorado

244 F. Supp. 261

Lloyd E. NICEWARNER, Sr., and Amelia J. Nicewarner, Plaintiffs, v. C. J. BLEAVINS and Thomas K. Hudson, Defendants.

Civ. A. No. 8715.

United States District Court D. Colorado.

August 4, 1965.

COPYRIGHT MATERIAL OMITTED

George W. Hopper, Denver, Colo., for plaintiffs.

Isaac Mellman, Denver, Colo., for defendant C. J. Bleavins.

Alice Loveland, Denver, Colo., for defendant Thomas K. Hudson.

WILLIAM E. DOYLE, District Judge.

This matter was tried to the Court on May 17, 18 and 19, 1965, and written memoranda have been submitted in lieu of final argument. The matter now stands submitted. This opinion sufficiently sets forth the facts so as to render formal findings unnecessary.

Plaintiffs Lloyd E. and Amelia J. Nicewarner seek the return of moneys paid by them for the purchase of a one per cent. interest in retained inventor's royalties on the ground that this transaction violated sections 12(1) and 12(2) of the Securities Act of 1933, as amended, Title 15 U.S.C. § 77l(1) and (2), and of section 10(b) of the Securities Exchange Act of 1934 and rule 10b-5 promulgated thereunder. Defendant C. J. Bleavins was the owner of the royalty interest sold to the Nicewarners. Defendant Thomas K. Hudson, is alleged to be liable as a "controlling person" and as a participant in the sale.

While a complete recitation of the facts is unnecessary, the evidence establishes the following: M. V. Lingenfelter invented a device called the Link Roto Timer, designed to replace the breaker points in a distributor on automotive engines. During the Summer of 1963, Lingenfelter informally agreed to assign one-third of his retained royalty interest to Bleavins and another one-third to Hudson in return for their assistance in the development and promotion of the Timer. Bleavins was to handle promotion, and Hudson was to assist in legal and business matters. Bleavins and Hudson have performed their respective functions, and a one-third interest was assigned to Bleavins. However, different arrangements were made with Hudson, and his share was sold to Alice Loveland, counsel here and an office associate of Hudson.

On August 11, 1963, plaintiffs, who were residents of the State of Illinois, registered as guests at the Compass Motel in Denver, Colorado, which motel was then owned by Bleavins. Nicewarner learned of the timer; examined plans in Bleavins' posession; accompanied Bleavins to Denver Plastic, Inc., a company then developing a working model and the probable future manufacturer of the device; discussed potential sales with a Mr. Ed Prather who organized a sales corporation; and interviewed the attorney handling the patent application on the timer. While the testimony is in conflict with respect to who initiated the transaction, at some time prior to August 17, 1963, Nicewarner agreed to buy, and Bleavins agreed to sell, three per cent. of Bleavins' one-third interest. Hudson, being an attorney familiar with the promotion, was called upon to draft the assignment, and the deal was consummated on August 17. Shortly thereafter, Bleavins noticed that the assignment incorrectly described Nicewarner's interest as 3 cents, instead of 3%. Bleavins called Nicewarner in Chicago to advise him of the error and requested that Nicewarner execute a correction. This was done and mailed from Chicago to Bleavins in Denver. Such is the background of this action in general. Additional facts will be set forth in the course of the opinion.

The second and third counts, the alleged violations of sections 12(2) and 10(b), are unsupported by the evidence. These claims rest on allegations of untrue statements regarding expected profits, the time within which the timer would be in production, the likelihood of success of this venture, the identity of companies and individuals expected to manufacture and market the device, financial commitments by certain parties, the existence of any orders for the timer, and so on. The statements in question were made to Nicewarner by Bleavins only, and the evidence does not establish that the statements were not made in good faith. In each instance there were circumstances which made the statements believable, and Bleavins was most optimistic about the prospects of this enterprise. Several models of the timer were tested, and the indications were that remaining difficulties could be eliminated. Plans for nationwide and even international distribution were mapped out with companies and individuals capable of undertaking such an extensive operation.

We conclude that Bleavins made no untrue statements, and that he did not omit to state facts which, in the light of the circumstances, would have made his statements true. To the extent that Bleavins made predictions which were not fulfilled, it is not necessary to determine whether these statements were held out as facts because it does not appear that Bleavins could have known of their untruth by taking reasonable precautions. Moreover, with regard to the claim under Section 10(b), Nicewarner did not rely on statements made by Bleavins. He relied on his own estimate of the venture based on his own investigations. Indeed, Nicewarner was a very willing buyer. Consequently, plaintiffs have failed to establish a claim for relief against either defendant under counts two and three.

As for the first count, the evidence does establish a cause of action against Bleavins. Section 12(1) provides:

"Any person who offers or sells a security in violation of section 5 15 U.S.C. § 77e * * * shall be liable to the person purchasing such security from him. * * *"

It is not disputed that Bleavins sold a portion of his royalty interest to the Nicewarners. The issues are whether the assignment in question is a "security" within the meaning of this section; whether the transaction involved a sufficient use of the mails or of interstate facilities; and whether the transaction is exempt from the registration requirement of section 5 as not involving a "public offering." That there has been no registration is undisputed.

Although Section 2, Title 15 U.S.C. § 77b(1) defines the term "security," the decisions indicate a liberal interpretation in the sense that substance controls. As the Supreme Court said in Securities & Exchange Commission v. C. M. Joiner Leasing Corporation, 320 U.S. 344, 64 S. Ct. 120, 88 L.Ed. 88 (1943):

"Some rules of statutory construction come down to us from sources that were hostile toward the legislative process itself and thought it generally wise to restrict the operation of an act to its narrowest permissible compass. However well these rules may serve at times to aid in deciphering legislative intent, they long have been subordinated to the doctrine that courts will construe the details of an act in conformity with its dominating general purpose, will read text in the light of context and will interpret the text so far as the meaning of the words fairly permits so as to carry out in particular cases the generally expressed legislative policy.

"In the Securities Act the term `security' was defined to include by name or description many documents in which there is common trading for speculation or investment. Some, such as notes, bonds, and stocks, are pretty much standardized and the name alone carries well settled meaning. Others are of more variable character and were necessarily designated by more descriptive terms, such as `transferable share,' `investment contract,' and `in general any interest or instrument commonly known as a security.' We cannot read out of the statute these general descriptive designations merely because more specific ones have been used to reach some kinds of documents. Instruments may be included within any of these definitions, as matter of law, if on their face they answer to the name or description. However, the reach of the Act does not

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