Reed v. Riddle Airlines, 17261.

• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)
• Citation: 266 F.2d 314
• Docket Number: No. 17261.,17261.
• Parties: Hiram M. REED, Laura M. Reed, a widow, and Hiram M. Reed, as Executor and Testamentary Trustee of the Estate of D. C. Reed, deceased, Appellants, v. RIDDLE AIRLINES et al., Appellees.
• Decision Date: 28 May 1959

266 F.2d 314 (1959)

Hiram M. REED, Laura M. Reed, a widow, and Hiram M. Reed, as Executor and Testamentary Trustee of the Estate of D. C. Reed, deceased, Appellants,
v.
RIDDLE AIRLINES et al., Appellees.

No. 17261.

United States Court of Appeals Fifth Circuit.

April 23, 1959.

Rehearing Denied May 28, 1959.

Thomas H. Anderson, Miami, Fla., Coleman Gay, Austin, Tex., Anderson & Nadeau, Miami, Fla., for appellants.

Frank A. Howard, Jr., James A. Dixon, Fred R. Baisden, Dixon, DeJarnette, Bradford & Williams, Miami, Fla., for appellee John Paul Riddle.

Before RIVES and TUTTLE, Circuit Judges, and SIMPSON, District Judge.

RIVES, Circuit Judge.

The appellants Reed sued for rescission of a contract by which they had

266 F.2d 315

agreed to sell 112,500 shares of stock in Riddle Airlines, Inc., to appellee, John Paul Riddle. Riddle counterclaimed for specific performance, or in the alternative for damages. The case was heard before the court aided by an advisory jury. The court denied to the appellants the rescission of their contract and awarded the appellee Riddle a judgment against the appellants for $96,475.15

The contract was agreed on between John Paul Riddle and Hiram Reed and called for the sale of the stock to Riddle for an average price of sixty cents per share payable over a period of four months. Riddle was president and general manager of Riddle Airlines and conversant with its affairs. Reed was a minority stockholder living in Austin, Texas, a considerable distance from the corporation's principal office in Miami, Florida. The basis of Reed's claimed right of rescission is thus summarized in appellants' brief:

"Reed claimed that Riddle occupied a fiduciary capacity as president and general manager of the corporation and that he owed a duty to disclose the facts which he knew affecting the value of the stock; that Riddle failed to disclose the fact that Arthur Vining Davis had become interested in buying stock in the corporation; that Riddle misrepresented the facts when he told Reed that there was no market for the stock; and that plaintiffs were entitled to rescind both because of the failure of the fiduciary to disclose a material fact and because of the representation that there was no market for the stock when in fact Davis was ready, able, and willing to buy large amounts of stock."

The appellants insist that, as president and general manager of the corporation, Riddle owed a fiduciary duty to the stockholders to disclose knowledge affecting the value of the stock which had come to his knowledge as an "insider," before purchasing the same from a shareholder. We agree, and have recently held to that effect in Mansfield Hardwood Lumber Company v. Johnson, 5 Cir., 263 F.2d 748, affirming a well-considered decision of Judge Ben C. Dawkins, Jr., of the Western District of Louisiana, reported in D.C., 159 F. Supp. 104, et seq. In this case that duty is emphasized by the Securities Exchange Act of 1934, 15 U.S.C.A. § 78a, et seq., and by Rule X-10B-5 adopted by the Securities and Exchange Commission to supplement Section 10(b) of that Act.¹ See Speed v. Transamerica Corporation, D.C.Del.1951, 99 F.Supp. 808, 828, 829. While we thus agree with the legal basis of appellants' claimed right of rescission, we do not agree that the evidence established such a right under the applicable law.

266 F.2d 316

Riddle Airlines, Inc., was engaged in the transportation of freight by air. It was organized shortly after the Second World War by John Paul Riddle who was its president until May, 1953. At about that time, the appellants Reed concurrently with five other persons, all of whom came to be known as "the Texas group" of stockholders, purchased as a whole about 300,000 shares of stock at forty cents per share. Riddle was replaced as president. Reed was made a director and later Judge C. R. Starnes of Gladewater, Texas, another member of the Texas group, became a director. Judge Starnes was a long-time friend and business associate of Reed. In August 1954, Riddle and his supporters regained control of Riddle Airlines, Inc., and Riddle again became president. Reed resigned as a director, but Judge Starnes remained a director until March 1955, when he also resigned. The contract involved in this suit was made on March 28, 1955.

Mr. Arthur Vining Davis had then become interested in buying stock in Riddle Airlines, Inc. Mr. Davis was an elderly man of great wealth and Chairman of the Board of Directors of Aluminum Corporation of America (Alcoa). Prior to March 24, 1955, Riddle had met Davis once at a heart benefit held at Davis' home and attended by several hundred people, but there had been no business dealings between Riddle and Davis.

On Thursday, March 24, 1955, Riddle contacted Mr. Davis by telephone and made an appointment to meet with him at Davis' office the following morning. Mr. Davis had acquired control of several enterprises and immediately thereafter they had ceased to ship air cargo on Riddle Airlines. Riddle's purpose in contacting Mr. Davis was to discover the reason for this loss of business and to endeavor to recapture it. The interview was concerned with that subject, the aluminum business, and aviation in general. Mr. Davis testified that a week or two before that meeting he had considered in his own mind the matter of buying Riddle Airlines stock, but that, as far as he knew, Riddle knew nothing about that. Riddle frankly admitted, however, that he sensed Davis' interest at this first meeting. "I knew he was interested — I could tell." That first meeting was on Friday, March 25.

On Sunday, the 27th, Riddle telephoned to Judge Starnes in Gladewater, Texas. Before the trial, Judge Starnes died. The district court sustained the plaintiffs' objections to Riddle's testimony as to their phone conversation. On cross-examination, however, plaintiffs' counsel announced, "I have nothing to hide," and himself inquired as to the conversation, with the results quoted in the margin.² That Riddle told Judge

266 F.2d 317

Starnes that Arthur Vining Davis was buying his stock is not contradicted, but is conclusively proved by the written draft drawn for the purchase price of the stock over the signature of "C. R. Starnes," dated March 28, 1955, in the amount of $35,000 and drawn on "Arthur Vining Davis" by his full name

Later in the same day, Monday, March 28, Riddle telephoned Reed in Austin, Texas, and was informed by Reed that Judge Starnes had already communicated with him. In that telephone conversation the contract involved in this suit was agreed on.

Most of the special findings of the advisory jury related to the critical telephone conversation between Riddle and Reed. Those findings were as follows:

"1. Did John Paul Riddle in his first telephone conversation with Mr. Reed on March 28, 1955, tell Mr. Reed that there was no market for the Riddle Airlines Stock.

"Yes ......

"No .. No ...

"2. Did John Paul Riddle know, or have good reason to believe that at the time of that telephone conversation that Mr. Arthur Vining Davis was going to become a purchaser of substantial amounts of stock, other than the stock of Judge Starnes.

"Yes ... Yes ..

"No .....

"3. If your answer to the above question is `yes,\' was Mr. Reed in that telephone conversation induced to make the agreement for the sale of the stock of the Reed Estate and his

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