Norris v. Wirtz

• Decision Date: 14 October 1983
• Docket Number: No. 82-2644,82-2644
• Citation: 719 F.2d 256
• Parties: Fed. Sec. L. Rep. P 99,520 Susan Mary NORRIS, Plaintiff-Appellant, v. William W. WIRTZ, individually and as trustee, Arthur M. Wirtz, individually and as trustee, St. Louis Arena Corporation, a corporation, Arena Bowl, Inc., a corporation, and Wirtz Corporation, a corporation, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 256

719 F.2d 256

Fed. Sec. L. Rep. P 99,520

Susan Mary NORRIS, Plaintiff-Appellant, v. William W. WIRTZ, individually and as trustee, Arthur M.

Wirtz, individually and as trustee, St. Louis Arena

Corporation, a corporation, Arena Bowl, Inc., a corporation,

and Wirtz Corporation, a corporation, Defendants-Appellees.

No. 82-2644.

United States Court of Appeals, Seventh Circuit.

Argued May 12, 1983.

Decided Oct. 14, 1983.

Edward J. Ross, Breed, Abbott & Morgan, New York City, Alan N. Salpeter, Mayer, Brown & Platt, Chicago, Ill., for plaintiff-appellant.

Richard L. Manning, George D. Crowley, Crowley, Fuller & Manning, Lawrence Jay Weiner, Fredric Bryan Lesser, Weiner, Neuman & Spak, Kenneth E. Scranton, Chicago, Ill., for defendants-appellees.

Before BAUER and WOOD, Circuit Judges, and ROSENN, Senior Circuit Judge. ^*

HARLINGTON WOOD, Jr., Circuit Judge. ^**

This matter is on appeal from the district court's dismissal of plaintiff Susan Norris' complaint for failure to state a cause of action under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b) (1976), and Rule 10b-5 of the Securities and Exchange Commission, 17 C.F.R. Sec. 240.10b-5 (1982). Norris v. Wirtz, 551 F.Supp. 46 (N.D.Ill.1982). Our jurisdiction is based on 28 U.S.C. Sec. 1291 (1976). Because we believe the district court erred in concluding that plaintiff's cause of action falls outside the ambit of the federal securities laws, we reverse the dismissal of plaintiff's complaint.

I.

The plaintiff's father, James Norris, died in February 1966. His will named his wife, Mary Norris, and defendant William Wirtz as co-executors of his estate. The will also provided that, upon the closing of the estate, any remaining property was to be divided into two trusts, one for the benefit of Mary Norris and the other for the benefit of plaintiff Susan Norris. Defendant William Wirtz was to serve as trustee and William Wirtz's father, defendant Arthur Wirtz, was named successor trustee.

Among the estate's assets were shares of common stock in three closely-held corporations, St. Louis Arena Corporation, Arena Bowl, Inc., and Judge & Dolph, Ltd. Defendant Arthur Wirtz was chairman of the Board of Directors and his son, defendant William Wirtz, was president and a director of each of the three corporations. In addition, defendant Wirtz Corporation, owned by defendants William and Arthur Wirtz, held the controlling interest in each of the same three corporations. What stock the Wirtzes did not own in the three corporations were assets in the estate.

In 1967 and 1968, the co-executors of James Norris' estate, Mary Norris and defendant William Wirtz, filed petitions in probate court seeking leave on behalf of the estate to sell shares of each of the three closely-held corporations in the form of repurchase and redemption of the stock by the corporations. The potential for self-dealing by the Wirtzes is obvious and, according to the complaint, the Wirtzes took full advantage of the opportunity at the expense of the decedent's daughter. When the estate's stock interest in the St. Louis Arena Corporation and in Arena Bowl, Inc. were redeemed from the estate by those corporations, the Wirtz Corporation thereby became the sole owner of both corporations. The Wirtz Corporation, in a slightly different manner, directly purchased the estate's minority interest in Judge & Dolph, Ltd. Thus, when the dealing was over, the Wirtzes effectively controlled all three of the closely-held corporations in which the estate had held stock, and to that extent became more of a beneficiary under the will than did plaintiff, the decedent's daughter.

Before the stock transactions were routinely approved by the probate court, however, the defendants went to plaintiff several times when she was eighteen and nineteen years old and secured her approval of the stock sales. It was in the course of inducing her uninformed approval of the sales that the defendants allegedly made the false statements substantially affecting the value and fair price of the stocks they were thereby acquiring.

II.

Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder were intended to provide a cause of action for any plaintiff who suffers an injury as a result of manipulative or deceptive practices made in connection with his or her sale or purchase of securities. Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 476, 97 S.Ct. 1292, 1302, 51 L.Ed.2d 480 (1977). The issue presented here is whether plaintiff Susan Norris actually had the power under the will to control the sale of the securities to the corporations controlled by defendants so as to establish a nexus between the misrepresentations made to the plaintiff by defendants and the securities sales.

The district court below concluded that although the plaintiff had standing to sue because of her position as a trust beneficiary of a securities sale, the misrepresentations made to plaintiff were only breaches of a trustee's fiduciary duties cognizable under state law. The court found that the plaintiff had no power to influence or control the defendant-trustee's investment decisions so that the defendant's misrepresentations to her were not made "in connection with the purchase or sale" of a security as required by the federal securities laws. Although we agree with the district court that plaintiff has alleged deception on the part of the defendants sufficient to satisfy Santa Fe Industries and agree with much of the court's discussion of standing, we disagree with its interpretation of plaintiff's ability under the will to control the stock sales at the time defendants' misrepresentations were made and consequently its determination that plaintiff has failed to state a cause of action under Section 10(b) and Rule 10b-5.

The complaint alleges that defendants misrepresented the value of the corporate assets and misrepresented that the proposed stock redemptions were in the best interest of the estate. At the present stage, involving an appeal from a decision to dismiss the complaint, the allegations in the complaint should be read liberally and the plaintiff should be entitled to the benefit of all inferences. Accordingly, we agree with the district court that plaintiff has made sufficient allegations of deception by the defendants to satisfy the requirements for a Section 10(b) or Rule 10b-5 violation announced in Santa Fe Industries. See Atchley v. Qonaar Corp., 704 F.2d 355, 359 (7th Cir.1983).

In addition to alleging manipulative or deceptive practices, a potential plaintiff must fit within the contours of the Birnbaum rule, established in Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir.), cert. denied, 343 U.S. 956, 72 S.Ct. 1051, 96 L.Ed. 1356 (1952), and adopted by the Supreme Court in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975), to maintain an action under Section 10(b) or Rule 10b-5. This "standing" requirement was invoked for various prudential and policy reasons to limit the class of plaintiffs who may sue under the federal securities laws and differs from ordinary Article III uses of standing. See Eason v. General Motors Acceptance Corp., 490 F.2d 654, 657 (7th Cir.1973), cert. denied, 416 U.S. 960, 94 S.Ct. 1979, 40 L.Ed.2d 312 (1974) (pre-Blue Chip decision).

The Birnbaum rule requires that a private party have actually dealt in a security, either as a purchaser or a seller, to have standing to bring a federal cause of action for damages. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 747, 95 S.Ct. 1917, 1931, 44 L.Ed.2d 539 (1975). In this case, the actual sales of the securities held in trust were made by the co-executors of plaintiff's father's estate, and not by plaintiff. Nonetheless, the district court, relying principally on Heyman v. Heyman, 356 F.Supp. 958 (S.D.N.Y.1973), and Hackford v. First Security Bank of Utah, N.A., 521 F.Supp. 541 (D.Utah 1981), concluded that the plaintiff was a seller even though she did not--and indeed could not--personally perform the mechanics of the sale. The rationale behind the decision is that the plaintiff experienced the direct impact of the securities transaction, for she was the beneficiary of the trust involved.

This position is attractive. The plaintiff is not a bystander as contemplated in Blue Chip Stamps and to grant standing under these circumstances seemingly does not threaten the concerns expressed in Birnbaum. See, e.g., Kirshner v. United States, 603 F.2d 234, 240-41 (2d Cir.1978), cert. denied, 442 U.S. 909, 99 S.Ct. 2821, 61 L.Ed.2d 274 (1979) ("We think the beneficiary of a pension trust, like the shareholder in a derivative suit, has standing to attack securities frauds perpetrated or threatened by the trustees of his fund."); James v. Gerber Products Co., 483 F.2d 944, 948 (6th Cir.1973) ("[T]he courts have generally inclined to a logical and flexible construction of the term 'purchaser-seller' in order to accommodate the avowed purpose of Sec. 10(b) of protecting the investing public and of ensuring honest dealings in securities transactions."); accord Mallis v. Federal Deposit Insurance Corp., 568 F.2d 824, 828-30 (2d Cir.), cert. granted, 431 U.S. 928, 97 S.Ct. 2630, 53 L.Ed.2d 243 (1977), cert. dismissed, 435 U.S. 381, 98 S.Ct. 1117, 55 L.Ed.2d 357 (1978) (per curiam) (pledgees of stock certificates have standing to sue under Section 10(b) and Rule 10b-5). This court anticipated this interpretation of the scope of the Birnbaum rule in O'Brien v. Continental Illinois National Bank & Trust Co., 593 F.2d 54 (7th Cir.1979). In O'Brien the plaintiffs, themselves trustees of pension funds, charged securities violations against Continental Bank, to which funds of the pension trust were turned over for investment. The plaintiffs argued that had the bank disclosed that it was purchasing securities for the pension trust funds in companies for which it was also a...