Stevens v. Vowell, 7823.

• Decision Date: 16 March 1965
• Docket Number: No. 7823.,7823.
• Parties: J. E. STEVENS, Appellant, v. Hollie VOWELL, Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

343 F.2d 374 (1965)

J. E. STEVENS, Appellant, v. Hollie VOWELL, Appellee.

No. 7823.

United States Court of Appeals Tenth Circuit.

March 16, 1965.

E. J. Skeen, Salt Lake City, Utah (J. D. Skeen, Salt Lake City, Utah, on the brief), for appellant.

Irving H. Biele, Salt Lake City, Utah (James A. Murphy, Salt Lake City, Utah, on the brief), for Appellee.

Before MURRAH, Chief Judge, and BREITENSTEIN and HILL, Circuit Judges.

HILL, Circuit Judge.

Appellee, Vowell, brought the action below against appellant, Stevens, and others, not parties here to recover $20,000 under the provisions of Section 27 of the Securities Exchange Act of 1934, as amended, 15 U.S.C.A. § 78aa. Trial was had to the court and Vowell was granted judgment against all of the defendants but only Stevens has appealed. He makes three contentions here: (1) The court lacked jurisdiction of the subject matter and the person of appellant; (2) insufficiency of the evidence; and (3) erroneous rulings of the court during the trial.

It was alleged in the complaint that: The action arises under Section 10 of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78(j), and Rule X-10B-5 of the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5; jurisdiction is invoked pursuant to 15 U.S.C.A. § 78aa; Vowell had conversations with the defendants during October and November, 1962, regarding an investment in an automatic archery lane to be constructed in Salt Lake City, Utah; on November 8, 1962, he entered into two agreements with the defendants, copies of such agreements being attached to and made a part of the complaint; the first agreement was between Vowell and the defendant, Worldwide Indoor Automatic Archery Lanes, Inc., (hereinafter referred to as Worldwide) and related to a total investment by Vowell in the sum of $20,000; the second exhibit was denominated "Agreement to Form a Corporation" and it provided for the distribution of corporate stock in a corporation to be formed in Utah with 25 shares of no par common stock to be distributed to Vowell for the $20,000 purchase price; Vowell paid Worldwide the $20,000 and demanded performance of the defendants according to the terms of the agreement, which they failed and refused to do; instrumentalities of interstate commerce were used by the defendants, acting in concert, in a course of business which operated as a fraud and deceit upon Vowell and resulted in their obtaining from him, upon spurious representation, the $20,000; and the acts and conduct of the defendants constituted a manipulative and deceptive device in connection with the sale of security to Vowell, in contravention of Rule X-10B-5 promulgated by the Securities and Exchange Commission.

The factual allegation of the complaint were established by the evidence adduced at the trial. The evidence also shows that Worldwide was organized as a corporation under the laws of the State of Washington with its principal office in Seattle. Its purpose was the promotion and development of the construction of indoor automatic archery lanes. Worldwide obtained its financing through franchised representatives in various states. These representatives were to obtain investors in their own areas for the construction of the archery lanes.

In October, 1962, Stevens and a codefendant, Moad, formed a partnership in Utah which was known as Worldwide Development Company of Utah (hereinafter referred to as Stevens-Moad partnership). This partnership became a franchised representative of Worldwide for the States of Utah, Idaho and Montana. Thereafter, Stevens contacted Vowell at the latter's residence in Murray, Utah, and solicited him to become an investor in and operator of an indoor automatic archery business. A number of conversations were had between them about this venture. As a result, Stevens wrote a letter of introduction to the president of Worldwide suggesting Vowell as an investor and Vowell traveled by car to Seattle, Washington, where the home office of Worldwide was located. There he met various officials of the company; was shown a device known as an Arro-Triever; and was told that it was owned by a subsidiary of Worldwide, when in fact it belonged to someone else and Worldwide had no right of ownership in it. This device was important in the construction of the automatic archery lanes. Stevens' partner, Moad, was in Seattle at the same time as Vowell and he made the arrangements for Vowell to meet the Worldwide officials. While in Seattle on this trip, Vowell was induced to sign an agreement designated "Agreement to Form a Corporation", the parties to which were Vowell, Worldwide and the Stevens-Moad partnership.

Under the terms of the agreement Vowell agreed to pay $20,000 for twentyfive shares of no par value common stock in a corporation to be formed in Utah. The purposes of the corporation, as stated in the agreement, included the management, sale and lease of automatic archery lanes and related equipment. Worldwide agreed to put up the sum of $20,000 and in return it was to receive 50 shares of no par common stock. The Stevens-Moad partnership was also to receive 25 shares of stock to permit the construction of the archery lanes under its existing franchise agreement. At the time of the execution of this agreement, Vowell paid the sum of $1,500 to Worldwide upon the contract and gave his promissory note in the amount of $18,500, payable in 30 days, to cover the balance of his contractual obligation. Worldwide paid nothing at this time upon its obligation, nor did it at any time thereafter pay anything as it had agreed to do.

Vowell returned to Utah and had another series of conversations with Stevens and Moad about the venture. He paid the $18,500 due on the promissory note to Worldwide by check which was negotiated thus completing his $20,000 investment. Just prior to the time this payment was made, Moad issued a "Letter of Intent" to Vowell, thereby agreeing, in the name of the Stevens-Moad partnership, to grant Vowell a 1/32 (3 1/8%) interest in the next seven operating corporations formed in the partnership franchise territory which was then comprised of the States of Arizona, Idaho, Utah, Montana and Wyoming.

The evidence is undisputed that Stevens and Moad had an arrangement with Worldwide whereby they would each receive 10 per cent of any sum invested by an investor, at their instance, in the archery lane program. Accordingly, each was paid the sum of $2,000 by Worldwide after Vowell's $18,500 payment was made. Vowell was not advised by anyone of such arrangement and knew nothing about these payments. Stevens and Moad had represented to Vowell that the entire amount of his investment would be used for the construction of the archery lanes in Utah. The evidence further discloses that Worldwide had received approximately $400,000 from investors such as Vowell and it had built no archery lanes in any locality.

The trial court made findings of fact covering, generally, the facts herein related and in addition found that: The defendants, Stevens, Moad, Choate and Reasoner, individually represented to Vowell that the $20,000 paid by him to Worldwide would be held in trust for the purpose of organizing a corporation as described in the "Agreement to Form a Corporation" and Worldwide would contribute $20,000, as agreed, all of which money would be used as operating capital by the corporation to be formed; the defendants, and each of them, knew that Vowell's $20,000 would not be held in trust, as agreed, and the defendants, Choate and Reasoner, knew that the financial condition of Worldwide would not allow it to retain the Vowell investment in trust or to match such funds; Vowell relied upon all of the representations made to him by the defendants; the defendants concealed certain critical facts concerning Worldwide from Vowell and made misrepresentations of other facts; the defendants, and each of them, used instrumentalities of interstate commerce in their plans and designs and in order to obtain Vowell's investment; the "Agreement to Form a Corporation", the letter of intent and the remittance constituted securities within the meaning of 15 U.S.C.A. § 78c(a) (10) and (11); and neither the securities nor the plan for financing Worldwide were registered with the Securities and Exchange Commission or on a national securities exchange.

We have carefully read and considered the entire record before us and have no difficulty in concluding that all of the crucial findings of fact made by the trial court are supported by the record. We are therefore bound by those findings on this appeal. Springer v. Townsend, 10 Cir., 336 F.2d 397.

Appellant's first argument in support of his contention that the court lacked jurisdiction of the subject matter of the lawsuit and over his person is that the allegations of the complaint are insufficient to bring the case within the purview of the statute and Rule X-10B-5. Little need be said about this belated attack upon the sufficiency of the complaint. The record before us shows that while the question was raised in appellant's answer, it was neither presented to nor ruled upon by the trial court. Rather, it appears that the case proceeded to trial upon the issues raised by the pleadings, without objection, and judgment was rendered on the evidence presented. In any event, this was not a common law fraud case and we think the allegations are sufficient under the "notice pleading" permitted by the Federal Rules of Civil Procedure. See Milliken v. Fidelity and Casualty Company of New York, 10 Cir., 338 F.2d 35, 39, 40.

It is next argued that the trial court did not have jurisdiction over the person of appellant because the suit was filed in the District of Utah and summons was served upon Stevens in Arizona. This argument is without merit. Under the broad provisions of 15 U.S. C.A. § 78aa,¹ the action may be brought or filed in one district and summons may be served upon the defendant in another...