Texas Continental Life Insurance Company v. Dunne

• Decision Date: 27 September 1962
• Docket Number: 14597.,No. 14596,14596
• Citation: 307 F.2d 242
• Parties: TEXAS CONTINENTAL LIFE INSURANCE COMPANY, Plaintiff-Appellee, v. Charles D. DUNNE and J. E. Dunne, II, Defendants-Appellants. TEXAS CONTINENTAL LIFE INSURANCE COMPANY, Plaintiff-Appellee, v. The BANKERS BOND COMPANY, Inc., and Elinore Sedley, Defendants-Appellants.
• Court: U.S. Court of Appeals — Sixth Circuit

307 F.2d 242 (1962)

TEXAS CONTINENTAL LIFE INSURANCE COMPANY, Plaintiff-Appellee, v. Charles D. DUNNE and J. E. Dunne, II, Defendants-Appellants.

TEXAS CONTINENTAL LIFE INSURANCE COMPANY, Plaintiff-Appellee, v. The BANKERS BOND COMPANY, Inc., and Elinore Sedley, Defendants-Appellants.

Nos. 14596, 14597.

United States Court of Appeals Sixth Circuit.

August 7, 1962.

As Amended August 15, 1962.

Rehearing Denied September 27, 1962.

COPYRIGHT MATERIAL OMITTED

Arthur W. Grafton, Louisville, Ky. (A. Berkowitz, Birmingham, Ala., H. Wendell Cherry, Louisville, Ky., Charles J. Najjar, Birmingham, Ala., on the brief, Wyatt, Grafton & Sloss, Louisville, Ky., Berkowitz, Lefkovits & Paden, Birmingham, Ala., of counsel), for Bankers Bond Co.

Henry R. Heyburn, Louisville, Ky. (Mark Davis, Jr., Louisville, Ky., Ira Lee Allen, Dallas, Tex., on the brief, Marshall, Cochran, Heyburn & Wells, Louisville, Ky., Thompson, Coe, Cousins & Irons, Dallas, Tex., of counsel), for Texas Continental Life.

Henry J. Stites, Louisville, Ky., for Charles D. Dunne and J. E. Dunne II.

Before CECIL and WEICK, Circuit Judges, and BOYD, District Judge.

WEICK, Circuit Judge.

This appeal is from an order granting plaintiff's motion, filed pursuant to Rule 50(b) of the Federal Rules of Civil Procedure, 28 U.S.C.A., for judgment in accordance with its motion for a directed verdict made at the close of all the evidence and after the jury had disagreed and a mistrial had been declared. The order was in conformity with the opinion of the District Judge reported in 187 F. Supp. 15.

Plaintiff's complaint contained two counts, one at common law for fraud and the second for conspiracy to violate the Federal Securities Act of 1933, as amended, the Federal Securities Exchange Act of 1934, as amended, and Rule X-10B-5 of the Federal Securities and Exchange Commission, in the sale of municipal bonds issued by the City of West Buechel, Kentucky, a city of 350 to 400 people.¹ Since the judgment of the District Court was based solely on the second count, we will consider only that count.

The lawsuit grows out of the purchase by plaintiff on April 29, 1955 of $100,000 face value "Waterworks, Sewer, Drainage and Street Revenue Bonds of the City of West Buechel" for which plaintiff paid $103,000 and which it seeks to recover claiming that the bonds were invalid and worthless. The bonds were part of an issue of $2,000,000 dated March 15, 1954.

The bonds were issued for the purpose of providing funds to construct a waterworks, sewer, drainage and street system for the City with reserve facilities for water plant distribution and storage from which revenue would be derived to create a sinking fund for the payment of interest and retirement of the bonds. A sinking fund was to be maintained from the proceeds of sale to pay interest.

The City contracted with Bankers Bond Company to do all the work incident to the issuance of the bonds, including the preparation of resolutions, contracts, minutes and notices and Bankers was to pay all expenses in connection therewith for which it would receive a commission equal to any sum over par received for such bonds up to 3% of the face amount of all bonds sold. The contract recited that it would "be futile to have a public sale of the bonds" and that Kentucky statutes permitted the City to sell the bonds in such manner and upon such terms as it deemed best. The contract provided that of necessity title to the bonds must technically pass to Bankers which in turn would pass title to the purchaser upon receipt of an offer above par. A circular setting out the opinion of its attorney was issued by Bankers. The bonds were printed by Dunne Press of which Charles D. Dunne was an officer.

The bonds were sold by Bankers through Charles D. Dunne as its agent to Jack Cage and Company of Dallas, Texas and were sent from Louisville, Kentucky to Dallas, Texas in a commercial airplane. Cage paid $335,000 in cash and executed an instalment note for $1,725,000 payable in seven equal annual instalments commencing March 15, 1956 with interest at 5% per annum. The note provided that, with the exception of the first instalment, all other instalments of principal or interest may be paid in cash or by the transfer without recourse to the holder of the note of Revenue Bonds issued by the City of West Buechel. The note was secured by an assignment of even date of an interest in a commission agreement and payment was guaranteed by an insurance company affiliated with Cage. Bankers assigned the note to the City. The ordinance passed by the Board of Trustees of West Buechel authorizing the sale of the bonds on credit contained no mention of the right reserved by Cage to transfer bonds as payments on the note.

Bankers received a fee of $60,000 from the cash payment. Out of this sum it paid $20,000 to Arlie Baker of Detroit as a "finders fee." Mr. Baker's connection with the transaction was that he was the husband of the former wife of Charles D. Dunne and the step-father of J. E. Dunne, II. The law firm of Col. Henry J. Stites, Bankers' attorney, received $10,000 for legal services and Bankers kept $30,000. The City of West Buechel received the balance of $275,000. Cage promised to pay the Dunnes $100,000 for their assistance in the transaction of which $25,000 was paid in cash to them and the balance was promised to be paid in deferred instalments. About two-thirds of the money received by the City was spent on improvements which benefited lands owned by corporations controlled by Mrs. Elinore Sedley who also controlled Bankers.

After the sale of the bonds to Cage, Charles D. Dunne and J. E. Dunne, II sought to resell some of the bonds for Cage on a commission basis. Charles D. Dunne introduced Ben Jack Cage of Jack Cage & Co. to Bevie F. Biggers who purchased the bonds acting as agent for plaintiff.

Only two payments were made as credits on the note which were made by draft drawn on a Dallas bank and transmitted by mail to a bank in Louisville, Kentucky and the note became in default.

The bonds were not advertised for sale or offered to investors through the normal channels. Since the City received only a small part of the proceeds of sale it did not have funds to construct the improvements for the payment of which the bonds had been issued. Without the improvements the City was unable to collect revenue to create a sinking fund for the payment of interest and principal for the retirement of the bonds.

There were a number of irregularities in the issuance and original sale of the bonds, but the principal ones relied on were the sale on credit to Cage and the provision in the note giving Cage the right to pay it by the transfer of the bonds. In reality this was a sale of only $335,000 of the bonds since the purchaser could rescind as to the balance by tendering back the bonds to the holder of the note.

Plaintiff claims that the defendants conspired to violate the law by bringing into existence this issue of bonds and launching it into the channels of trade by a series of interstate transactions and use of the mails whereby some of the bonds were sold to plaintiff who was an innocent purchaser. Specifically, it was claimed that defendants omitted to state material facts which were necessary in order to make the prospectus which had been issued not misleading. The material facts which plaintiff claims defendants omitted to state were the sale of the issue on credit and the provision in the note authorizing transfer of bonds in payment.

Defendants did not deny the sale on credit to Cage or the provisions in the note giving him the right to transfer bonds as payments of the note. They did deny that they had omitted to state material facts and claimed that Mr. Biggers was fully advised of all of these facts before he made the purchase.

Whether Biggers had knowledge of these facts was a vital issue in the case which was bitterly contested before a jury. Biggers testified that he relied on the provisions of the bonds, the prospectus and statements made to him by the Dunnes and did not know of the prior sale of the issue on credit to Cage and if he had known he would not have purchased the bonds for the plaintiff.

Charles D. Dunne testified as follows concerning knowledge of Mr. Biggers of the sale to Cage on credit:

"Q. Now, you did talk to Mr. Biggers about these bonds from Cage did you not?

"A. I have testified so many times on this point. Mr. Biggers wanted to meet Mr. Cage. He knew all about the bonds —

"Q. You just didn\'t talk to him about it?

"A. I set up a meeting with Mr. Cage and I was there when he brought the bonds. I was very much surprised Mr. Cage would buy that big wad of Texas Continental stock, and I didn\'t talk to him about it, but he did know they were bought on credit because I tried to borrow on the contract and I explained it to him."

James E. Dunne, II testified:

"Q. Please tell the jury as best you recollect what you told Mr. Biggers about the West Buechel bonds.

"A. Well, as has been stated, it was an unusual transaction, therefore worthy of note, and I had told Mr. Biggers of the fact that Jack Cage and Company had purchased the Two Million bond issue in its entirety. I told him also of the circumstances under which Jack Cage and Company made it over, told him of the fact that they had paid $275,000 in cash, that they had executed a note for a million, seven hundred twenty-five, that they had paid I believe it was 3 points or $60,000 above the par value, and that this million, seven hundred twenty-five thousand dollars would be paid in 7, I believe it was 7, instalments, of approximately a quarter of a million dollars each, and that with the cash the City of West Buechel would receive, that certain improvements would be constructed, that this was a relatively undeveloped area, which was a fact well known.

"Q. Now, you understand that you are under oath, do you not? Sir?

"A. Yes, sir.

"Q. Do you swear to this jury

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