Shonts v. Hirliman, 8358-Y

• Decision Date: 17 July 1939
• Docket Number: No. 8358-Y,8301-Y,21-Y.,8358-Y
• Citation: 28 F. Supp. 478
• Court: U.S. District Court — Southern District of California
• Parties: SHONTS et al. v. HIRLIMAN et al. CALDWELL v. SAME. WOGAHN v. SAME.

28 F. Supp. 478

SHONTS et al. v. HIRLIMAN et al.

CALDWELL v. SAME.

WOGAHN v. SAME.

Nos. 8358-Y, 8301-Y, 21-Y.

District Court, S. D. California, Central Division.

July 17, 1939.

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Frederick W. Mahl, Jr., of San Francisco, Cal., for plaintiff Sydney L. Shonts.

David I. Lippert, of Los Angeles, Cal., for plaintiffs W. W. Caldwell and Lester E. Wogahn.

Swarts & Tannenbaum, of Los Angeles, Cal. (Louis E. Swarts, of Los Angeles, Cal., of counsel), for defendant George A. Hirliman.

Lloyd Taraday, of Los Angeles, Cal., for defendant Webster, Atz & Co.

Leo Shapiro, of Los Angeles, Cal., for defendant Michael Hoffman.

YANKWICH, District Judge (after stating facts as above).

The problems presented by these motions must be solved by an analysis of the statute or by reference to similar statutes or claims of similar character, because, owing to the newness of the Securities Act of 1933, there are no cases determining them.

The Congress of the United States, for the first time in its history, undertook in 1933, to pass a statute similar to the state Corporate Securities statutes, commonly known as "blue sky laws". They take their name from their object, which is to prevent promoters of corporate securities from selling "the blue sky" to investors, or at least, from promising it to them. Most of these statutes are regulatory only. They regulate the securities which may or may not be issued or sold in a state and set up agencies for the granting of permits to issue or sell securities. They do not, as a rule, create any special claim of a civil nature for falsity in the application for a permit. The person who feels defrauded, by any misrepresentation relating to the stock, must resort to the law action of deceit or to the equity suit of rescission.

This Act, however, creates a civil liability of a specific character. It provides that if any part of the registration statement contains an untrue statement of material facts or omits to state material facts, the person who acquires the security, without knowledge of the untruth or omission, may sue either at law or in equity, the person who signed the registration statement, the officers or directors of the corporation which applied for the registration, and the accountants or others who certified to the registration statement or prepared it. 15 U.S.C.A. § 77k.

The measure of damages is not the one which usually obtains in fraud, — the difference between the value of the thing bought and what it would have been if it had been as represented.

I refer, for illustration of the latter rule, to Hines v. Brode, 1914, 168 Cal. 507, 143 P. 729, and to a later case, in which I was of counsel for the defendant, Palladine v. Imperial Valley Farms Lands Association, 1924, 65 Cal.App. 727, 225 P. 291. I quote from Hines v. Brode, supra 168 Cal. 507, 143 P. 730: "The price paid may be considered only as evidence of value. Therefore, in a proper case, a wronged plaintiff may assert, as here, and, if possible, show, that the actual value of the property was only $100, and that its value, if the property had been as represented, was $4,000. He may also show and recover for the depreciation in the value of the improvements which he may have placed upon the property — a depreciation resulting from the fact that the actual value was not the represented value; and he may also recover for any other legitimate expenditures he may have made." This rule was abolished in California by the Amendment of 1935 to Section 3343 of the Civil Code (St.1935, p. 1612).

If we study the Securities Act of 1933, and especially Section 11, which creates a right of action which would not otherwise exist, we find that the Congress did not adopt this rule, but made the measure of recovery that which had always obtained in actions for fraud in the courts of the United States. Thus, the Supreme Court in Smith v. Bolles, 1889, 132 U.S. 125, 129, 130, 10 S.Ct. 39, 40, 33 L.Ed. 279:

"The measure of damages was not the difference between the contract price and the reasonable market value if the property had been as represented to be, even if the stock had been worth the price paid for it; nor, if the stock were worthless, could the plaintiff have recovered the value it would have had if the property had been equal to the representations. What the plaintiff might have gained is not the question, but what he had lost by being deceived into the purchase. The suit was not brought for breach of contract. The gist of the action was that the plaintiff was fraudulently induced by the defendant to purchase stock upon the faith of certain false and fraudulent representations, and so as to the other persons on whose claims the plaintiff sought to recover. If the jury believed from the evidence that the defendant was guilty of the fraudulent and false representations alleged, and that the purchase of stock had been made in reliance thereon, then the defendant was liable to respond in such damages as naturally and proximately resulted from the fraud. He was bound to make good the loss sustained, — such as the moneys the plaintiff had paid out and interest, and any other outlay legitimately attributable to defendant's fraudulent conduct; but this liability did not include the expected fruits of an unrealized speculation. The reasonable market value, if the property had been as represented, afforded, therefore, no proper element of recovery.

"Nor had the contract price the bearing given to it by the court. What the plaintiff paid for the stock was properly put in evidence, not as the basis of the application of the rule in relation to the difference between the contract price and the market or actual value, but as establishing the loss he had sustained in that particular. If the stock had a value in fact, that would necessarily be applied in reduction of the damages. `The damage to be recovered must always be the natural and proximate consequence of the act complained of,' says Mr. Greenleaf (volume 2, § 256); and `the test is,' adds Chief Justice Beasley in Crater v. Binninger, 33 N.J.L. 4 Vroom 513 518, 97 Am.Dec. 737, `that those results are proximate which the wrong-doer, from his position, must have contemplated as the probable consequence of his fraud or breach of contract.' In that case the plaintiff had been induced by the deceit of the defendant to enter into an oil speculation, and the defendant was held responsible for the moneys put into the scheme by the plaintiff in the ordinary course of the business, which moneys were lost, less the value of the interest which the plaintiff retained in the property held by those associated in the speculation." (Italics added.)

And see, Sigafus v. Porter, 1900, 179 U.S. 116, 21 S.Ct. 34, 45 L.Ed. 113; Tooker v. Alston, 1907, 8 Cir., 159 F. 599, 16 L.R. A.,N.S., 818; Towle v. Maxwell Motor Sales Corp., 8 Cir., 1928, 26 F.2d 209.

The Act, in section 11, subdivision (e), provides that the recovery shall be of such damages as shall represent the difference between the amount paid for the security and "(1) the value thereof as of the time such suit was brought, or (2) the price at which such security shall have been disposed of in the market before suit, or (3) the price at which such security shall have been disposed of after suit but before judgment if such damages shall be less than the damages representing the difference between the amount paid for the security (not exceeding the price at which the security was offered to the public) and the value thereof as of the time such suit was brought". 15 U.S.C.A. § 77k (e).

It is evident that the Congress intended to make the action, notwithstanding its origin in fraud, purely compensatory. And so, it provided for the recovery of the price paid. It anticipated three possible contingencies: (1) Where there has been no sale of the stock; (2) where there has been a sale of the stock before the action was brought or (3) a sale after the action was brought.

Where there has been no sale of the stock, the recovery is for the difference between the value of the stock when purchased, and its value as of the time suit is brought. Where there has been a sale, the recovery is for the difference between the price received by the seller and the price he paid.

Before disposing of this question and the question of limitation, I comment briefly on the evidence in the record as it relates to the elements of the action created by the statute.

I am satisfied that the omission from the statement of the minimum requirements in the leases, which obligated Condor Pictures, Inc., to shoot at least 100 days a year, is material. It is not of any great significance that the lease was not actually entered into until later. For that reason, I am of the view that there is no falsity in the statement that they had certain rental arrangements with a particular company. I think the oral negotiations and the telegram of January 1, 1937, showed a commitment which the parties themselves considered binding, and which was to be later embodied in a more formal instrument. The effect of these conclusions is this: No misstatement or omission appears in the registration statement until after the last certificate of Webster, Atz & Co., dated January 19, 1937. Prior to January 31, 1937, there were merely discussions of rental, and no definite undertaking by either side or guarantee of a minimum, which was binding on the company. The failure of the certificate of Webster, Atz & Co. to set up the rental undertaking and the minimum guarantee of $35,000 as a contingent liability, is not the omission of anything which existed then. The rental arrangement was not called to their attention. There was no entry on the books at their disposal, from which, by further inquiry, they might have discovered that there was such an undertaking. Absent these, they cannot be charged with a misrepresentation which was made later — long...