Royal Air Properties, Inc. v. Smith, 17900.

• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)
• Writing for the Court: ORR, JERTBERG and MERRILL, Circuit
• Citation: 312 F.2d 210
• Parties: ROYAL AIR PROPERTIES, INC., a Corporation, Harold L. Heathman and Madge I. Heathman, Appellants, v. R. Philip SMITH, Appellee.
• Docket Number: No. 17900.,17900.
• Decision Date: 20 December 1962

312 F.2d 210 (1962)

ROYAL AIR PROPERTIES, INC., a Corporation, Harold L. Heathman and Madge I. Heathman, Appellants,
v.
R. Philip SMITH, Appellee.

No. 17900.

United States Court of Appeals Ninth Circuit.

December 20, 1962.

312 F.2d 211

Ralph B. Potts, Seattle, Wash., for appellants.

Bogle, Bogle & Gates, Walter B. Williams, and Edward G. Lowry, III, Seattle, Wash., for appellee.

Before ORR, JERTBERG and MERRILL, Circuit Judges.

ORR, Circuit Judge.

Having in mind the construction of luxury apartments in Palm Springs, California, one Meade Hargiss interested appellant Harold L. Heathman, his sister Esther Peister and his son Michael Heathman in the project; and as a consequence a corporation, Royal Air Properties, Inc., was formed. In furtherance of bringing the objective of the plan to fruition the corporation acquired a seven-acre tract in Palm Springs for a purchase price of $235,000. The sum of $70,000 was paid as a down payment; the remainder was to be paid within two years.

From September 1956 through March 1957 plans were being worked out for the construction of seventy-one luxury apartment units and other facilities. One apartment unit was completed about the end of March 1957.

In the fall or winter of 1956, appellee Smith learned of the project that Royal Air Properties was undertaking. To the person from whom he had received the information as to the Royal Air project, he expressed an interest in obtaining an apartment in Palm Springs. Shortly thereafter he was contacted by Harold Heathman with the purpose of getting him (Smith) interested in purchasing an apartment in the Royal Air project. During the next several months Smith received letters and literature from Heathman describing the Royal Air development. On April 27, 1957 Dr. Smith made a trip to Palm Springs and remained there until April 30th of the same year. He was conducted over the Royal Air project by Harold Heathman and was solicited by said Heathman to purchase stock in said Royal Air Properties. Responsive to this solicitation Smith, on or about May 16, 1957, purchased five hundred shares of the stock of Royal Air Properties and paid the sum of $50,000 therefor. This money was borrowed and Smith has paid interest thereon in excess of $11,000.

From September 12, 1956 to April 12, 1957 Meade Hargiss was President of Royal Air Properties. He was removed from said office by the Board of Directors on April 12, 1957 and offered the position of Chairman of the Board. He declined the offer and resigned as a Director.

312 F.2d 212

Harold Heathman was elected President. Hargiss gave Heathman a letter demanding payment of a loan he had made to the corporation and refusing to accept stock in the corporation in payment thereof. Heathman did not inform Smith of this letter or of its contents prior to his purchasing stock in the corporation

During the time Dr. Smith was in Palm Springs from April 27 to April 30, 1957, he was given a "Land Use Analysis — Proposed Development Plan" by Harold Heathman. In this prospectus estimates of profits and of "return to investor" were made without considering the cost of the land that the corporation was proposing to develop. Also no mention was made of the $165,000 mortgage (trust deed) on the land or the provision for its payment ($82,500 was due in less than five months and the balance within seventeen months).

In addition to the sample unit, the corporation completed but one six-unit building. In January 1958, a month after the above building had been constructed, the property of the corporation was attached as a part of the action brought by Hargiss in an effort to recover the money he had loaned the corporation. Eventually the entire tract was sold at a substantial loss, and the assets of the corporation were liquidated. Subsequent to the liquidation of the company Dr. Smith brought a suit under the provisions of section 10 of the Securities Exchange Act of 1934, as amended, 15 U.S.C.A. § 78j and Rule X-10B-5 (now Rule 10b-5) of the rules and regulations issued by the Securities and Exchange Commission under that Act, 17 C.F.R. § 240.10b-5. The suit was also based on sections 20 and 29 of the same Act, 15 U.S.C.A. §§ 78t(a) and 78cc.

Notwithstanding the fact that neither section 10 nor Rule 10b-5 expressly provide a civil remedy, we have held that a civil cause of action may be brought to enforce this section of the Act. Errion v. Connell, 236 F.2d 447 (9th Cir., 1956); Fratt v. Robinson, 203 F.2d 627, 37 A. L.R.2d 636 (9th Cir., 1953). While the above cited cases involved sellers of securities, we later held that a civil remedy is also available to a purchaser of securities. Ellis v. Carter, 291 F.2d 270 (9th Cir., 1961); Matheson v. Armbrust, 284 F.2d 670 (9th Cir.,...