Pelletier v. Stuart-James Co., Inc., STUART-JAMES

• Citation: 863 F.2d 1550
• Decision Date: 23 January 1989
• Docket Number: STUART-JAMES,No. 87-8911,87-8911
• Parties: Fed. Sec. L. Rep. P 94,180, 7 UCC Rep.Serv.2d 1607 Ronald O. PELLETIER and Ronald O. Pelletier d/b/a ROP Investments, Plaintiffs- Appellants, v.COMPANY, INC., et al., Defendants-Appellees et al.
• Court: United States Courts of Appeals. United States Court of Appeals (11th Circuit)

Page 1550

863 F.2d 1550

Fed. Sec. L. Rep. P 94,180, 7 UCC Rep.Serv.2d 1607

Ronald O. PELLETIER and Ronald O. Pelletier d/b/a ROP Investments, Plaintiffs- Appellants, v. STUART-JAMES COMPANY, INC., et al., Defendants-Appellees et al.

No. 87-8911.

United States Court of Appeals Eleventh Circuit.

Jan. 23, 1989.

Herbert P. Schlanger, Atlanta, Ga., for plaintiffs-appellants.

Christa Dagmar Taylor, Hart & Trinen, Donald T. Trinen, Denver, Colo., Rufus T Dorsey, IV, Parker Hudson Rainer & Dobbs, Atlanta, Ga., for defendant-appellee.

Appeal from the United States District Court for the Northern District of Georgia.

Before RONEY, Chief Judge, COX, Circuit Judge, and MORGAN, Senior Circuit Judge.

MORGAN, Senior Circuit Judge:

This is a suit to recover damages for alleged securities fraud arising under Sections 10(b) and 20 of the Securities Exchange Act of 1934, as well as common law and the Georgia Securities Act of 1973. Appellant Ronald O. Pelletier d/b/a ROB Investments, is a customer of appellee, Stuart-James Company, Inc. ("Stuart-James"). Stuart-James is a registered broker-dealer with the Securities and Exchange Commission and has an office in Atlanta, Georgia. Appellee Coy Paschal, Jr., ("Paschal"), was an account executive of Stuart-James in Atlanta, Georgia. Appellee Art Rocker is an agent of Stuart-James and supervisor of Paschal in connection with the security transactions at issue in this action.

In March 1986, Paschal on behalf of Stuart-James allegedly entered into an agreement with appellant that Stuart-James would sell appellant 10,000 units of the initial public offering of Universal Medical Buildings, Inc. ("UMB") at a price of $2.50 per unit. Each unit of the public offering consisted of five common shares of UMB and two warrants which could be converted into UMB's stock. The units of the public offering constituted securities under the Exchange Act.

As a condition for selling appellant 10,000 units of the public offering, Paschal allegedly required appellant to buy stock of Denpac Corporation ("Denpac") and to cause another account to be opened with Stuart-James. As part of the alleged agreement with Stuart-James, appellant purchased 12,000 shares of Denpac common stock and 250 shares of Denpac preferred stock. On March 3, 1986, appellant delivered a check in the amount of $7,140 to Stuart-James as a payment for the Denpac stock. Appellant contends that he would not have purchased the shares of Denpac stock but for the fact that Stuart-James refused to sell units of the initial public offering to appellant unless appellant purchased shares of Denpac stock.

After appellant purchased the shares of Denpac stock, Paschal informed appellant that Stuart-James could deliver to appellant only 1,000 units of the public offering rather than the 10,000 units of UMB's public offering. On March 5, 1986, appellant mailed a check in the amount of $2,500 for 1,000 units of UMB's public offering. Thereafter, Paschal repeatedly sought permission from appellant to sell appellant's 1,000 units of the public offerings of UMB on the day of the public offering. Appellant refused to make a binding commitment to allow Paschal to sell the 1,000 units of the public offering.

On March 17, 1986, appellant telephoned Paschal to instruct him to sell appellant's units of the public offering of UMB. Paschal informed appellant that the appellees had not delivered the units of the public offering to appellant. Appellant contends that appellees refused to deliver the units of UMB's public offering because appellant refused to agree to sell the units in the aftermarket on the day of the public offering.

Appellant filed a six-count claim on April 15, 1986, based on appellees' fraud in connection with the purchase and sale of securities. Appellant's complaint includes claims for violations of Sections 10(b) and 20 of the Securities Exchange Act of 1934, common law intentional misrepresentation and fraud, breach of contract, fraud in the inception of the contract, and violations of the Georgia Securities Act of 1973.

On October 6, 1987, the trial in the action commenced in the United States District Court for the Northern District of Georgia. At the conclusion of appellant's evidence, the district court stated [I] conclude that the plaintiff has failed to prove any elements that would entitle plaintiff to recover under any of the theories observed by the plaintiff.

And I also conclude that even if the plaintiff has established liability, the plaintiff has failed to establish any legally recoverable damages causally connected to any of the actions by any of the defendants. Therefore, the motion for directed verdict is granted.

The district court judge entered the order on October 14, 1987, granting the appellees' motion for directed verdict.

On appeal, appellant contends that there is sufficient evidence to present a jury question on the issues of appellees' fraud in connection with the sale of securities to appellant and appellant's damages. Appellant alleges that Paschal's promise in connection with a securities transaction to sell appellant 10,000 units of UMB's public offering although secretly intending not to sell the stock to appellant violates Section 10(b) of the Securities Exchange Act of 1934. Furthermore, appellant alleges that appellees' later contract to sell appellant 1,000 units of UMB although appellees had a secret plan, undisclosed to appellant, of delivering new issue only if the purchaser agreed to sell the stock on opening date of the new issue violates Section 10(b). Finally, appellant alleges that there is sufficient evidence of appellees' intentional misrepresentation and fraud to present a jury question.

In reviewing the district court's order granting appellees' motion for a directed verdict, the court must examine the whole record in a light most favorable to the party opposing the motion. Dempsey v. Auto Owners Ins. Co., 717 F.2d 556, 559 (11th Cir.1983). A directed verdict is appropriate only when there can be but one reasonable conclusion as to the verdict. Id.

Section 10(b) of the Securities Exchange Act of 1934 makes it unlawful to "use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance." ¹ 15 U.S.C. Sec. 78j(b). Rule 10b-5, promulgated by the Securities and Exchange Commission under Section 10(b), prohibits any "artifice to defraud" or any act "which operates or would operate as a fraud or deceit upon any person, 'in connection with the purchase or sale of any security.' " ² 17 C.F.R. Sec. 240.10b-5; see Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977).

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The United States Supreme Court, in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975), held that a private damages action under Section 10(b) and Rule 10b-5 is confined to actual purchasers or sellers of securities. ³ Id. It is equally well established that a contract to purchase or sell securities constitutes the purchase or sale of securities within the meaning of the antifraud provisions of the securities laws. Id., 421 U.S. at 750-51, 95 S.Ct. at 1932-33, (citing 15 U.S.C. Sec. 78c(a)(13) and (14)). ⁴ Accordingly, a person who alleges a violation of Rule 10b-5 must demonstrate that he is an actual purchaser or seller, or that he was party to a legally enforceable contract to purchase or sell securities. ⁵

In essence, one of appellant's theories of liability is based on a fraudulent refusal to perform a contract for the sale of 10,000 units. Appellees contend that the alleged agreement failed to comply with the Georgia "Statute of Frauds" for securities sales, O.C.G.A. Sec. 11-8-319(a), which provides:

A contract for the sale of securities is not enforceable by way of action or defense unless:

(a) There is some writing signed by the party against whom enforcement is sought or by his authorized agent or broker sufficient to indicate that a contract has been made for sale of a stated quantity or described securities at a defined or stated price.

In response, appellant argues that there was sufficient evidence to take the contract out of the statute of frauds and render it enforceable. Appellant contends that appellant's claim of entitlement to 10,000 units of UMB securities should not be subject to the statute of frauds because of the broker's "admission" as to the existence of "the agreement," as well as the brokerage firm's negotiation of a check sent by appellant, allegedly for the purchase of 1,000 units.

The court notes that in the complaint, and throughout the course of the trial, the appellant's theory was based on a fraudulent refusal to perform a contract for the sale of 10,000 units of UMB securities, not a later alleged contract for the sale of 1,000 units. The record shows no "admissions" were made with respect to the 10,000 unit contract, nor was any payment made or accepted with respect thereto. Furthermore, appellant has failed to offer any writing signed by Stuart-James or by any authorized agent indicating that a contract existed for the sale of the UMB securities. Consequently, appellant's theory based on a fraudulent refusal to perform a contract for the sale of 10,000 units of UMB securities must fail because the alleged agreement is unenforceable as a matter of law. ⁶ Where a contract is unenforceable, an action for damages cannot be maintained on the ground of fraud in refusing to perform the contract, even though the promisor at the time of making the oral contract may have had no intention of performing it. See Canell v. Arcola Housing Corp., 65 So.2d 849, 851 (Fla.1953); see also Caplan v. Roberts, 506 F.2d 1039, 1041 (9th Cir.1974) (interpreting California law).

Section 10(b) and Rule 10b-5 proscribe fraudulent conduct "in connection with the purchase or sale of...