Soft Water Utilities, Inc. v. LeFevre

Decision Date14 March 1974
Docket NumberNo. 1--1072A88,1--1072A88
Parties, Blue Sky L. Rep. P 71,120 SOFT WATER UTILITIES, INC., Defendant-Appellant, v. Richard L. LeFEVRE, Plaintiff-Appellee.
CourtIndiana Appellate Court

J. A. Bruggeman, Douglas E. Miller, James M. Prickett, Fort Wayne, for defendant-appellant.

Kendall, Stevenson, Howard & Lowry, Danville, Rexell A. Boyd, Greencastle, for plaintiff-appellee.

ROBERTSON, Presiding Judge.

The plaintiff-appellee (LeFevre) brought this action against defendants Soft Water Utilities, Inc., C. A. Farrell, and N. Hurst, to recover damages for fraud, aggravated by conspiracy, arising out of a securities transaction. The trial court after a bench trial entered judgment for LeFevre and awarded him $6,644 in damages plus interest from April 8, 1959, and costs. Soft Water brings this appeal and urges that the trial court's judgment is not supported by sufficient evidence and is contrary to law with respect to LeFevre's allegations of fraud, agency, and conspiracy, with respect to proof of damages.

In 1958 Soft Water was desirous of issuing an additional 50,000 shares of common stock in order to raise money for working capital and for expansion purposes. The corporation already had outstanding 250,000 shares of common stock. A prospectus was prepared and registered with the Indiana Securities Commission, and the asking price per share for the new issue was set at $5.00. The prospectus contained a balance sheet which showed the corporation's net worth to be $343,690.85.

To facilitate the sale of these securities, Soft Water entered an agreement with defendant C. A. Farrell, a licensed stockbroker, which provided that Farrell would be the exclusive sales representative for the new issue. Farrell employed defendant N. Hurst to assist him in deposing of the new issue.

In April, 1959, Hurst visited LeFevre in the latter's home to discuss the stock issue. LeFevre read the prospectus at this time, and after talking with Hurst for about two hours decided to buy 2,080 shares. This litigation arose because what was actually delivered to LeFevre was not 2,080 shares of the new issue stock, rather 2,080 shares of the previously issued stock which had a market value somewhat less than the $5.00 asked for the new issue.

In reviewing a judgment challenged as not being supported by sufficient evidence, we are constrained to consider only that evidence most favorable to the appellee. We can neither weigh the evidence nor determine the credibility of witnesses. Nugent v. Smith (1972), Ind.App., 287 N.E.2d 899; Engelbrecht v. Tri-State Franchisers, Inc. (1972), Ind.App., 287 N.E.2d 365.

We first note that LeFevre's action against Soft Water is not based upon the Indiana Securities Law as it stood in 1959. Ind.Ann.Stat. § 25--829 et seq. (Burns 1960). The only civil remedy available thereunder was an action for recission by the purchaser. Ind.Ann.Stat. § 25--847 (Burns 1960). In this case LeFevre did not seek recission, but damages instead. He chose to retain the shares of stock transferred to him. That the legislature did not intend the Securities Law to be an exclusive remedy was evident:

'The rights and remedies provided by this act shall be in addition to any and all other rights and remedies that may exist at law or in equity.' Ind.Ann.Stat. § 25--850 (Burns 1960).

The essential elements of common law fraud have long been established as being material misrepresentation, scienter, reliance, and injury. See Middlekamp v. Hanewich (1970), 147 Ind.App. 561, 263 N.E.2d 189; Farm Bureau Mut. Ins. Co. of Ind. v. Seal (1962), 134 Ind.App. 269, 179 N.E.2d 760. We will review the evidence most favorable to the appellee to determine the existence of each element.

Several misrepresentations were made to LeFevre by Hurst. Hurst stated that the new issue of 50,000 shares was almost sold out, when in fact only 1,089 shares were ever sold. In addition, Hurst led LeFevre to believe that the latter was buying new issue stock rather than previously issued stock. The two men discussed the use to which the corporation would put the funds acquired through the sale of the new issue with Hurst stating that the funds would go to the corporate treasury. The prospectus given to Lefevre by Hurst dealt, of course, only with the new issue. That these misrepresentations were material cannot be seriously contested. If most of the new issue shares had been sold the net worth of the corporation would have been augmented by anywhere from $200,000 to $250,000, less the brokers fee.

Soft Water contends that no false representations were made, and instead that during the discussion between Hurst and LeFevre the conversation turned away from the new issue towards a transaction in stock previously issued. Soft Water points to the fact that the prospectus called for cash, but LeFevre, not having the necessary cash, offered his 1,000 shares in First United Life Insurance Company instead. Hurst told LeFevre that he was not authorized to accept anything other than cash and that he would have to check with Farrell. Farrell approved the deal and credited LeFevre $10 per share for the First United stock, which closely approximated its market price at that time. Soft Water contends that since LeFevre knew that Soft Water Utilities would not accept stock in exchange for the new issue shares, and since LeFevre was experienced in securities transactions, he was aware that the subject matter of the transaction had changed to previously issued stock, and, hence, no false representation was made. LeFevre, on the other hand, states that the understanding was that Farrell would either sell the First United stock on the open market or buy it himself, and use the cash proceeds to purchase the new issue shares from Soft Water. The trial court accepted LeFevre's understanding of the transaction and the record adequately supports such a finding.

The next element required is scienter. The evidence indicated that Hurst may not have been aware of the falsity of his representations concerning the total number of new issue shares already sold and the nature (new issue or previous issue) of the stock being sold to LeFevre. However, that does not preclude the existence of scienter. Hurst received his information and instructions from his employer, Farrell, and the evidence is such that scienter can readily be inferred to Farrell. Farrell, the exclusive agent for Soft Water for the sale of the new issue, had convinced the board of directors of the corporation that in order to 'support the market' for the new issue, it was necessary for him to buy and sell the stock previously issued. During the period of the exclusive relationship, Farrell bought and/or sold approximately 17,000 shares previous issue stock, selling the shares at $5.00 each, while the total number of new issue shares ever sold was 1,089. These facts support the trial court's finding that previous issue stock was being sold as new issue. Hence arose the inference that Farrell was aware that false representations were being made to LeFevre by Hurst in furtherance of Farrell's scheme. Soft Water suggests that scienter cannot be established by inference, but the law is to the contrary. See Grissom v....

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