Shull v. Dain, Kalman & Quail, Inc.

• Decision Date: 26 September 1977
• Docket Number: No. 76-1935,76-1935
• Citation: 561 F.2d 152
• Parties: Fed. Sec. L. Rep. P 96,152 Daniel L. SHULL, Appellant, v. DAIN, KALMAN & QUAIL, INC., a corporation, and Harry Ware, Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 152

561 F.2d 152

Fed. Sec. L. Rep. P 96,152

Daniel L. SHULL, Appellant, v. DAIN, KALMAN & QUAIL, INC., a corporation, and Harry Ware, Appellees.

No. 76-1935.

United States Court of Appeals,

Eighth Circuit.

Submitted May 18, 1977.

Decided Aug. 26, 1977.

Rehearing Denied Sept. 26, 1977.

John Stevens Berry (made rebuttal), Friedman & Berry, Lincoln, Neb., filed appearance, made argument, filed appendix, appellant's brief and appellant's reply brief for appellant.

James H. O'Hagan, Dorsey, Windhorst, Hannaford, Whitney & Halladay, Minneapolis, Minn., Kenneth C. Stephan, Lincoln, Neb. (argued), and Roger Magnuson, Edward Pluimer, Minneapolis, Minn., on brief, for appellees.

Before BRIGHT and HENLEY, Circuit Judges, and BENSON, Chief District Judge. ^*

HENLEY, Circuit Judge.

During 1972 and 1973 plaintiff, Daniel L. Shull of Lincoln, Nebraska, speculated heavily in a certain corporate stock, referred to in the record and briefs as Champion Home Builders stock (Champion). In 1972 he bought largely on margin and borrowed large sums of money from Nebraska banks to make the required down payments and meet margin calls. During most of the first half of 1972 the price of the stock rose sharply; it then fell dramatically and continued to fall throughout 1973. Plaintiff dealt with the brokerage firm of Dain, Kalman & Quail, Inc. (DKQ) of Minneapolis, Minnesota; his actual dealings were with Harry Ware, DKQ's branch manager in Lincoln. On June 5, 1975 plaintiff commenced this action in the district court against DKQ and Ware seeking to recover damages to compensate him for his losses.

The complaint, as amended, was in eleven counts and was broadly based. It was alleged that Ware and DKQ, acting through Ware, violated: (1) The Securities Act of 1933, 15 U.S.C. §§ 77a et seq.; (2) the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq.; (3) Rule 10(b)(5) of the Securities & Exchange Commission, 17 C.F.R. § 240.10(b)(5); (4) Regulation "T" of the Board of Governors of the Federal Reserve System issued pursuant to § 7 of the 1934 statute that has been mentioned; (5) certain rules of the New York Stock Exchange and of the National Association of Security Dealers issued pursuant to §§ 6, 15A and 19 of the 1934 statute; (6) the Nebraska Securities Act, Neb. R.R.S. §§ 8-1101 et seq., as amended. Plaintiff also alleged that the defendants had been guilty of common law fraud, deceit, negligence and breach of fiduciary duty. No question has been raised as to federal subject matter jurisdiction, and such jurisdiction is established.

The tenth count of the complaint which charged negligence and breach of duty was dismissed without prejudice. The remaining counts were tried without a jury before Chief District Judge Warren K. Urbom. At the conclusion of plaintiff's case the defendants moved for judgment pursuant to Fed.R.Civ.P. 41(b). On September 30, 1976 the district court filed a full memorandum opinion, granted the defense motion, and dismissed Counts I-IX and XI of the complaint with prejudice. This appeal followed.

Rule 41(b) provides that after a plaintiff has completed his case in the course of a nonjury trial, the defendant, without waiving his right to introduce evidence should his motion be denied, may move for judgment on the ground that the plaintiff has shown no right to relief. If such a motion is made, the trial court, as trier of the facts, is to determine them and may render judgment against the plaintiff or may decline to render any judgment until the close of all of the evidence. If the motion is granted, the trial court is required to make findings as required by Rule 52(a).

Speaking of the standard that a district court is required to apply in passing on a Rule 41(b) motion and the review standard that we apply in passing upon the action of a district court in granting such a motion, we said recently in Lang v. Cone, 542 F.2d 751, 754 (8th Cir. 1976) The function that a trial judge performs in passing upon a Rule 41(b) motion in a nonjury case is not the same as the function that a trial judge performs in the course of a jury trial when he is called upon to rule on a defense motion for a directed verdict at the close of the plaintiff's case or at the close of all of the evidence. In the latter case the judge simply decides whether there is substantial evidence to take the case to the jury, and in making that determination he is required to view the evidence in the light most favorable to the plaintiff, and to give the plaintiff the benefit of all favorable inferences reasonably to be drawn from the evidence. In a Rule 41(b) situation, however, the district court may find the facts itself and may render judgment against the plaintiff if the court considers that plaintiff has not made out a case, and if the district court sustains the Rule 41(b) motion, its findings will not be reversed on appeal unless clearly erroneous. Smith v. South Central Bell Telephone Co., 518 F.2d 68 (6th Cir. 1975); Taylor v. Honeywell, Inc., 497 F.2d 1382 (10th Cir. 1974); Palmentere v. Campbell, 344 F.2d 234 (8th Cir. 1965); 9 Wright and Miller, Federal Practice & Procedure, § 2371.

It is familiar law, of course, that a factual finding of a district court is "clearly erroneous" if it is not supported by substantial evidence or, even though there be substantial evidence to sustain it, the reviewing court is clearly satisfied that a mistake has been made. However, it is not the function of an appellate court to try the case de novo, or to pass upon the credibility of witnesses or on the weight to be given to their testimony, and a finding is not clearly erroneous simply because a different result might have been reached had the case been tried originally to the appellate court. However, a factual finding that is based upon the application of an erroneous legal standard cannot be upheld. See in general Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 89 S.Ct. 1562, 23 L.Ed.2d 129 (1969); United States v. United States Gypsum Co., 333 U.S. 364, 68 S.Ct. 525, 92 L.Ed. 746 (1948); United States v. Wright, 428 F.2d 445 (8th Cir. 1970); Minneapolis, St. Paul & S. S. M. R. Co. v. Metal-Matic, Inc., 323 F.2d 903 (8th Cir. 1963); Republic Rice Mill, Inc. v. Empire Rice Mills, Inc., 313 F.2d 717 (8th Cir. 1963); Blackhawk Hotels Co. v. Bonfoey, 227 F.2d 232 (8th Cir. 1955); Noland v. Buffalo Ins. Co., 181 F.2d 735 (8th Cir. 1950); Hudspeth v. Esso Standard Oil Co., 170 F.2d 418 (8th Cir. 1948). See also 9 Wright and Miller, Federal Practice & Procedure, §§ 2585-86, pages 729-40.

Before going further, we find it desirable to refer to the individual counts of the complaint since an advance familiarity with those counts should make our statement of the facts and discussion of the issues a good deal more intelligible.

Count I alleged a private civil action based on an alleged violation of § 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l (2). That statute imposes liability on anyone who offers or sells a security by use of a communication that includes an untrue statement of a material fact or omits to state a material fact necessary to make the statements that have been made not misleading. Suit under § 12(2) must be filed within one year after the injured party discovers the misstatement or omission or should have discovered it by the exercise of ordinary care. 15 U.S.C. § 77m.

Count II alleged a violation of § 17(a) of the 1933 Act, 15 U.S.C. § 77q(a). Section 17(a) makes it unlawful for one to employ fraudulent or deceptive devices in connection with the sale of securities. However, it does not confer in terms a private cause of action in favor of a person who purchases a security that has been sold to him in violation of the section. In Greater Iowa Corp. v. McLendon, 378 F.2d 783, 788-90 (8th Cir. 1967), we held that the private remedy of a purchaser must be found in § 12(2) and not in § 17(a).

Count III was based on § 9 of the 1934 Act, 15 U.S.C. § 78i. Section 9(a)(4) makes it unlawful for any dealer, broker or other person selling or offering to sell a security to make a statement about it which he knows to be false or misleading or which he had reasonable grounds to believe was false or misleading. And § 9(e) creates a private cause of action in favor of a person who has suffered damage as a result of purchasing a security at a price that had been affected by a violation of § 9(a).

The district court thought that the primary thrust of plaintiff's claim was to be found in Count IV which was based on § 10(b) of the 1934 Act and on Rule 10(b)(5) of the Securities & Exchange Commission. In relevant part, the Rule, which accords with the statute, is as follows:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.

In Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), the Supreme Court held that a suit based on § 10(b) and Rule 10(b)(5) cannot be successfully maintained on the basis of negligence alone, and that in order to prevail a plaintiff must show scienter, that is to say a fraudulent, deceptive or manipulative intent.

In Count V plaintiff claimed a violation of Regulation "T" of the Board of Governors of the Federal Reserve System (Federal Reserve Board), 12 C.F.R., Part 220, that was issued pursuant to the authority conferred by § 7(c) of the 1934 Act, 15 U.S.C. § 78g...