Pidcock v. Sunnyland America, Inc., 87-8898

• Decision Date: 06 September 1988
• Docket Number: No. 87-8898,87-8898
• Citation: 854 F.2d 443
• Parties: , Fed. Sec. L. Rep. P 94,013 John F. PIDCOCK, Plaintiff-Appellant, v. SUNNYLAND AMERICA, INC., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 443

854 F.2d 443

57 USLW 2196, Fed. Sec. L. Rep. P 94,013

John F. PIDCOCK, Plaintiff-Appellant, v. SUNNYLAND AMERICA, INC., et al., Defendants-Appellees.

No. 87-8898.

United States Court of Appeals Eleventh Circuit.

Sept. 6, 1988.

J. Wiley Ellis, Adams, Gardner, Ellis, Inglesby & Falligant, P.C., Ronald C. Berry, Savannah, Ga., for plaintiff-appellant.

Malcolm R. Maclean, Hunter, Maclean, Exley & Dunn, P.C., Savannah, Ga., for Sunnyland.

William U. Norwood, Alexander & Vann, 218 E. Jackson St., Thomasville, Ga., for Harvard, et al.

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

Before TJOFLAT, VANCE and COX, Circuit Judges.

VANCE, Circuit Judge:

A fraudulent purchaser escaped 10b-5 liability in the district court on the ground that the plaintiff had failed to prove loss causation. We reverse.

I.

Appellant John Pidcock and L.B. "Dude" Harvard, Sr. each owned fifty percent of Sunnyland America, Inc., a holding company for the ownership and operation of several meat packing plants. Dude Harvard served as president of the corporation and was actively involved in the daily operations of the meat packing companies. Pidcock served as chairman of the board, and although he attended the quarterly board meetings regularly he did not participate in the daily operations of the business.

Dude Harvard had two sons, Joe and Bryant, who both began working for Sunnyland at an early age and gradually worked their way up to management positions. In 1981 Joe was promoted from vice president in charge of sales and marketing to president of the corporation. Bryant was vice president in charge of operations. The Harvard sons' growing control over Sunnyland's operations was consistent with the desire of Dude Harvard and Pidcock that one day Joe and Bryant would take over the business.

Eventually Dude Harvard and Pidcock began to explore the possibility of selling Sunnyland. ¹ Joe Harvard took responsibility for conducting all sale negotiations, including the coordination of all information relating to potential purchasers. Pidcock trusted and relied on his longtime partner's son to provide him with all material information.

After one serious prospective purchaser of Sunnyland failed to follow through with an offer, the three Harvards decided to buy out Pidcock. On October 22, 1982 Joe and Bryant met with Pidcock and formally offered to purchase Pidcock's half of the company for $2.2 million. The Harvards painted a gloomy forecast for the possibility of any third party interest in buying Sunnyland. On October 26 Pidcock wrote Joe Harvard to accept the offer. Pidcock made this decision for several reasons, including the Harvards' assurances that sale of the company to a third party was doubtful. ² On December 21 Pidcock signed a contract for the redemption of his stock.

There were numerous conversations between Pidcock and the Harvards between the October 22 offer and the December 21 signing. Joe represented the Harvards during the negotiations. There was little direct communication between Pidcock and Dude Harvard. Pidcock made it clear that he knew he was selling his interest in Sunnyland at a bargain price. He also informed the Harvards that a possibility of selling Sunnyland to a third party would cause him to reconsider his decision to sell out, and that a likelihood of selling the company to a third party would cause him to change his decision to sell altogether. Pidcock questioned Joe Harvard repeatedly regarding the existence of an interested third party. With one minor exception, ³ Joe made no mention of any interested third parties.

Joe Harvard, however, was not telling the truth. In the fall of 1982, at least a month before Pidcock signed the sales contract, Joe Harvard had met with Deming Whiting, a real estate broker, to discuss the general business aspects of Sunnyland. Although this meeting had been more of an information session than a negotiation session, Joe Harvard had indicated that he would sell Sunnyland for $14 million. Joe Harvard later met again with Whiting and a financial consultant for further discussion about Sunnyland's financial condition.

In November John Sherman, a real estate broker with the Richard Tift Company, had learned of Joe Harvard's interest in selling Sunnyland. On December 10 Sherman had called Harvard and obtained permission to list Sunnyland for sale at $16 million. Six days later Sherman had called Harvard again and revealed that the Field Packing Company had an interest in Sunnyland. Joe Harvard had agreed to supply Sherman with more information about Sunnyland.

On the morning of December 21 Sherman and his senior business associate Richard Tift had met with Dude and Joe Harvard in Sunnyland's offices. After the meeting, Dude Harvard had spoken privately with Tift and asked him, as a personal favor, not to mention to Pidcock anything about the Harvards' efforts to sell Sunnyland. That afternoon, Pidcock executed the redemption agreement.

After the signing of the redemption agreement, Sherman continued to work towards the sale of Sunnyland to Field Packing. On March 30, 1983 Sunnyland and Pidcock closed on the redemption of Pidcock's shares. After the redemption the Harvards instituted a program of operational changes and improvements to Sunnyland facilities at a cost of over $1 million. Eventually Soparind Meat Packing Corporation purchased Sunnyland in January 1985 for a total of $7.3 million. In the summer of 1986 Pidcock learned from Richard Tift of Tift's December 1982 meeting with Joe Harvard.

Pidcock filed this action under Rule 10b-5 on October 1, 1986 seeking to recover the difference between the true fair market value of his stock and the $2.2 million he received. ⁴ Following a bench trial the district court found that had Pidcock known of the brokerage arrangement between the Harvards and the Tift Company and of Field Packing's interest in Sunnyland, Pidcock would have postponed the December 21 execution of the redemption agreement. The district court noted that Dude Harvard's request that Richard Tift not tell Pidcock about the Harvards' efforts to sell Sunnyland implied that the Harvards themselves believed that Pidcock would have reconsidered had he known of the Harvard-Tift relationship. The district court thus held that the misrepresentation or omission of this information was material under Rule 10b-5. ⁵ The district court also held that the Harvards made the material false representations or omissions with scienter, and that Pidcock justifiably relied on them.

The district court, however, ruled that because Soparind was not a viable purchasing prospect prior to January 1984, Soparind's purchase of Sunnyland was beyond the causal chain of events flowing from the Harvards' fraudulent conduct. The district court viewed Soparind as "a completely different purchaser, unrelated to the information withheld from Pidcock when he entered the redemption agreement." 682 F.Supp. 1563, 1580. The court therefore held that Pidcock had failed to prove proximate causation of damages. The court denied recovery under Rule 10b-5.

II.

The district court found, and the Harvards do not contest on appeal, that Pidcock proved the first three elements of a cause of action under Rule 10b-5. See supra note 5. Pidcock argues on appeal that the district court erred in granting judgment for defendants on the sole ground that Pidcock failed to establish that the Harvards' deception proximately caused him any damages. ⁶ Pidcock specifically argues that the district court failed to consider a line of securities cases providing that where a defrauding purchaser obtains a profit, the defrauded seller may be able to recover that profit as damages. Where this disgorgement remedy applies, Pidcock contends, the plaintiff is entitled to a presumption on the issue of proximate causation.

The traditional rule for measuring damages proximately caused by a defendant's fraud in 10b-5 actions is the difference between the value of the securities at the time of the fraudulent transaction and the price received. Alley v. Miramon, 614 F.2d 1372, 1387 (5th Cir.1980). The Supreme Court has held that the general measure of damages for defrauded sellers is the difference between what the seller received and what the seller would have received had there been no fraudulent conduct. Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 155, 92 S.Ct. 1456, 1473, 31 L.Ed.2d 741 (1972); see Dupuy v. Dupuy, 551 F.2d 1005, 1024-25 (5th Cir.), cert. denied, 434 U.S. 911, 98 S.Ct. 312, 54 L.Ed.2d 197 (1977). Where the defrauding purchaser receives more than the seller's actual loss, however, the damages are the purchaser's profits. Affiliated Ute, 406 U.S. at 155, 92 S.Ct. at 1473; see Randall v. Loftsgaarden, 478 U.S. 647, 106 S.Ct. 3143, 3153, 92 L.Ed.2d 525 (1986).

The origin of the rule that a defrauding purchaser's profits must be disgorged is Janigan v. Taylor, 344 F.2d 781 (1st Cir.), cert. denied, 382 U.S. 879, 86 S.Ct. 163, 15 L.Ed.2d 120 (1965), which was cited with approval in Affiliated Ute. The Janigan court held that once it has been determined that a purchaser acquired property by fraud, any profit subsequently realized by the defrauding purchaser should be deemed the proximate consequence of the fraud. 344 F.2d at 786. The court's holding applied whether or not the profit was foreseeable. Id.; see Falls v. Fickling, 621 F.2d 1362, 1368 n. 15 (5th Cir.1980). In an oft-quoted passage the Janigan court explained:

[I]f the property is not bought from, but sold to the fraudulent party, future accretions not foreseeable at the time of the transfer even on the true facts, and hence speculative, are subject to another factor, viz., that they accrued to the fraudulent party. It may, as in the case at bar, be entirely speculative whether, had plaintiffs not sold, the series of fortunate occurrences would have happened in the same way, and to their...