Robinson v. Cupples Container Co., 73-3094

• Decision Date: 25 March 1975
• Docket Number: No. 73-3094,73-3094
• Citation: 513 F.2d 1274
• Parties: Blue Sky L. Rep. P 71,251, Fed. Sec. L. Rep. P 95,054 L. S. ROBINSON, Plaintiff-Appellant, v. CUPPLES CONTAINER CO. et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1274

513 F.2d 1274

Blue Sky L. Rep. P 71,251, Fed. Sec. L. Rep. P 95,054

L. S. ROBINSON, Plaintiff-Appellant, v. CUPPLES CONTAINER CO. et al., Defendants-Appellees.

No. 73-3094.

United States Court of Appeals Ninth Circuit.

March 25, 1975.

Noble K. Gregory (argued), San Francisco, Cal., for plaintiff-appellant.

Robert D. Raven (argued), of Morrison, Foerster Holloway, Clinton & Clark, San Francisco, Cal., for defendants-appellees.

OPINION

Before BARNES, WRIGHT and TRASK, Circuit Judges.

EUGENE A. WRIGHT, Circuit Judge:

Plaintiff Robinson appeals from an adverse judgment in his suit for damages under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and rescission of a stock exchange contract under Cal.Corp.Code § 26100, based on diversity. We affirm.

The plaintiff and his partner, Paul Merner, operated Magi-Cup, a plastic cup manufacturing company in California. Desiring a broader base of financing and an opportunity to move into a national market, plaintiff approached defendant Cupples Container Company (Container) at a trade meeting in Nevada in November of 1966. He suggested the possibility of a merger and invited Container to examine his plant and financial reports.

After several months of negotiation, Container agreed to purchase Magi-Cup's stock. Plaintiff demanded Container stock in return for his shares of Magi-Cup while his partner accepted cash and a note. The contract of sale was signed in March of 1967 in Missouri, where Container had its headquarters. The exchange of stock also took place there.

After the exchange of stock, plaintiff acted as head of the former Magi-Cup plant until he was removed in November of 1967. He still holds the Container stock he received in the exchange and remains a director of Container.

He filed suit in October of 1969, his amended complaint alleging that Container had violated § 10(b) and Rule 10b-5 by falsely representing that Robinson would be placed in charge of all Container's cup manufacturing operations following the stock exchange (executive claim), by falsely representing that Container would invest significant sums in the expansion of the Magi-Cup operation on the West Coast (investment claim), and by falsely representing the value of Container stock as a basis for the exchange ratio (value claim). Based on diversity, plaintiff also sought rescission of the exchange, arguing that the transaction was void because Container failed to register its stock in California prior to soliciting and negotiating the exchange there.

After the plaintiff rested his case, the court directed a verdict for the defendant on the investment claim, holding that there had been no material misrepresentation. Following presentation of defendant's case, the court directed a verdict on the executive claim. The value claim was given to the jury with a standard of duty instruction objected to by plaintiff. The jury found for the defendant.

The court dismissed the state claim prior to trial, holding that plaintiff had failed to allege that the contract was executed or the Container stock delivered in California, as required by California case law.

I. MATERIAL MISREPRESENTATIONS

Plaintiff alleged that Container violated § 10(b) of the Securities Exchange Act and Rule 10b-5 ¹ by making promises which were false when made concerning the executive and investment claims and by misrepresenting the financial picture and value of Container's stock.

As we stated in Marx v. Computer Sciences Corporation, 507 F.2d 485, 489 (9th Cir. 1974):

The applicable test of materiality is essentially objective (see 2 Bromberg, Securities Law: Fraud § 8.3, at 201 (1973)): " . . . whether 'a reasonable man would attach importance (to the fact misrepresented) in determining his choice of action in the transaction in question.' " List v. Fashion Park, Inc., 340 F.2d 457, 462 (2nd Cir. 1965).

Where the representation in question is a promise of one of the parties, the representation must be viewed in the light of the relationship of the parties, the context in which the statement was made, the experience and bargaining position of the investor and the nature of the transaction as well as the character of the underlying fact. Cf. Taylor v. Smith, Barney & Co., Inc., 358 F.Supp. 892, 895 (D.Utah, N.D.1973), and cases cited there.

Investment Claim.

At the close of the plaintiff's case, the court directed a verdict for Container on the investment claim. In reviewing the directed verdict

we are required to decide "whether the evidence in its entirety would rationally support a verdict for the plaintiff, assuming that the jury took, as it would be entitled to take, a view of the evidence most favorable to the plaintiff." Wilkerson v. McCarthy, 336 U.S. 53, 65, 69 S.Ct. 413, 93 L.Ed. 497 . . . (1949) (Frankfurter, J., concurring).

Uniform Oil Co. v. Phillips Petroleum Co., 400 F.2d 267, 268 (9th Cir. 1968).

Plaintiff based his argument on four letters which indicated Container's awareness of the need for funds to expand the Magi-Cup plant, including payment for equipment already ordered for such expansion. Plaintiff's partner, in the course of negotiation of the contract of sale, asked that a specific provision on investment be placed in the agreement. In the last letter, Container stated:

As to paragraph # 2, Cupples Container Corporation will not state or agree in the contract to come to a "substantial sum that it proposes to invest in Magi-Cup, etc."

The contract ultimately signed made no provision for investment by Container in the Magi-Cup plant. Taken in the context of the negotiations and Container's clear refusal, prior to execution of the contract, to commit itself to investment in the plant, the representation alleged by the plaintiff cannot be said to be material. No reasonable investor would attach importance to the earlier statements about investment in making his decision to execute the stock exchange contract.

Executive Claim.

Plaintiff alleged that the chief executive of Container, at a meeting three months before the execution of the stock exchange contract, represented that Robinson would be placed in charge of all of Container's cup manufacturing operations after the merger. Defendant denied it.

Plaintiff conceded that he never raised the issue again during subsequent negotiations nor did Container make any mention of it. Nothing was said in the contract about this alleged representation, although plaintiff was required to tender his resignation as an officer of Magi-Cup and promise not to compete with Container or have any dealings with a company with a name similar to Magi-Cup, unless as an officer of Magi-Cup itself.

Plaintiff, under questioning by his own attorney, stated that the meeting at which the promise had been made was "exploratory."

No proof was offered of the falsity of the alleged promise except the fact that Robinson had never been placed in charge of Container's manufacturing operations; Container had denied making the promise and asserted that it had intended only to place him in charge of the former Magi-Cup plant.

Here the parties were engaged in arm's length negotiations for the sale of a manufacturing company. Several months of negotiation preceded the execution of the stock exchange contract negotiations in which plaintiff and his partner were actively engaged and in which they were represented by counsel. Employment questions were not foreign to these dealings. The terms of the contract, while not dealing with the alleged executive position with Container, stipulated terms which placed plaintiff's continued employment as an officer of Magi-Cup within the discretion of Container.

Plaintiff makes no allegation that defendants dissuaded him from having the contract provide a guarantee of his employment with Container. In fact he admits that Container made no statement at all about it after the initial exploratory meeting.

The alleged promise of employment cannot be regarded as a matter to which a reasonable investor would attach importance where it was made at an exploratory meeting followed by several months of arm's length negotiations (in which the experienced parties had assistance of counsel) leading to a detailed contract of sale. Section 10(b) has not converted the merger process into a game of chance in which any remark, irrespective of the ultimate contract provision, can lead to liability.

It should be emphasized that we are not faced with a contract of adhesion or negotiations in which one of the parties had a significant bargaining advantage. Moreover, the parties were in no confidential relationship. The negotiations in question involved arm's length bargaining by experienced businessmen who were represented by counsel. The decision on the materiality of such an alleged representation might be different if these elements were absent. In this case, the district court properly directed a verdict for the defendant.

II. JURY INSTRUCTIONS ON DUTY STANDARD

Plaintiff argues that the district court erred in refusing to instruct the jury on a strict liability standard with respect to the value claim. The court instructed the jury to find Container liable for a material misrepresentation if they found that defendant had "intentionally or negligently misrepresented or failed to declare facts regarding the fair value of Container stock."

In White v. Abrams, 495 F.2d 724, 728 (9th Cir. 1974), this court rejected a claim that § 10(b) imposed a duty of strict liability to insure the truth and reliability of material representations made by persons in connection with the sale or purchase of securities, saying:

We reject such a broad construction since there is no...