Van Dyke v. Coburn Enterprises, Inc.

• Decision Date: 05 June 1989
• Docket Number: No. 88-5104,88-5104
• Citation: 873 F.2d 1094
• Parties: Blue Sky L. Rep. P 72,975, Fed. Sec. L. Rep. P 94,404 Les VAN DYKE, Ben Steensma, Larry Van Dyke, and Jim Reese, Appellants, v. COBURN ENTERPRISES, INC., James H. Coburn, Thomas M. Coburn, Rose Ann Peterson, James M. Coburn, Roger McKellips and State Bank of Alcester, Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1094

873 F.2d 1094

Blue Sky L. Rep. P 72,975, Fed. Sec. L. Rep. P 94,404

Les VAN DYKE, Ben Steensma, Larry Van Dyke, and Jim Reese, Appellants, v. COBURN ENTERPRISES, INC., James H. Coburn, Thomas M. Coburn Rose Ann Peterson, James M. Coburn, Roger McKellips and State Bank of Alcester, Appellees.

No. 88-5104.

United States Court of Appeals Eighth Circuit.

Submitted Nov. 18, 1988.

Decided April 28, 1989.

Rehearing Denied June 5, 1989.

Thomas K. Wilka, Sioux Falls, S.D., for appellants.

Lawrence L. Piersol, Sioux Falls, S.D., and David C. Humphrey, Yankton, S.D., for appellees.

Before HEANEY ^* and BEAM, Circuit Judges, and LARSON, ^** Senior District Judge.

HEANEY, Senior Circuit Judge.

This action involves a securities transaction between a small South Dakota company, Coburn Enterprises, and four Minnesotans. After the deal went sour, the four Minnesotans brought an action against Coburn Enterprises, its shareholders, the State Bank of Alcester (Bank) and the Bank's president for violations of state and federal law. The district court directed a verdict against appellants on some claims and in favor of the Bank on its counterclaim, and the jury found against them on others and found for the Coburns on their counterclaim. The four Minnesotans appeal, raising a variety of issues, all of which are discussed in this opinion. We affirm as to all issues, other than the issue of whether prejudgment interest should be allowed the Coburns on their counterclaim; we reverse on that issue.

I. BACKGROUND

The four Minnesotans (the appellants) were engaged in the businesses of farming, transporting, and raising and marketing artichokes. Through an organization known as American Energy Farm Systems (AEFS), which is a promoter of artichokes and a marketer of artichoke seeds, the appellants were directed to an alcohol fuels plant located at Sherman, South Dakota, owned by Coburn Enterprises, which, in turn, was owned by members of the Coburn family.

After the appellants expressed an interest in having the Coburn plant process their artichokes, the conversation turned to the possible investment by the appellants in Coburn Enterprises. One of the appellees, Jim Coburn, Sr., explained to the appellants that there had been an explosion at the plant and that the plant was not running because it lacked operating capital. The negotiations between the parties began in earnest near the end of September of 1982 when the parties met at the alcohol plant for four and one-half hours.

During this meeting, another of the appellees, Tom Coburn, gave the appellants a thorough tour of the plant and discussed the need for outside investors. Tom Coburn advised the appellants that the plant could produce anhydrous alcohol--197 proof or greater. The starting price was $450,000 for one-fourth share of Coburn Enterprises.

Some of the appellees then traveled to Minnesota to meet with the appellants. The appellants were advised at that time that the State Bank of Alcester, South Dakota, was servicing Coburn Enterprises' Farmers Home Administration (FmHA) loan. The Coburns asked the appellants to meet with the Bank president, Roger McKellips, who was a South Dakota state senator and a civic promoter of alcohol production.

At that meeting, McKellips stated that "alcohol was really booming" and that approximately $300,000 worth of tax credits were available for investing in the alcohol plant. McKellips asked the appellants if they were interested in purchasing stock in the plant and advised them that he believed that the Coburns would reduce the price.

The parties had several additional meetings and phone conversations. The appellants repeatedly asked if the plant would be able to produce anhydrous alcohol on a continual basis because they felt that the alcohol must be of that high of proof to be marketable. Both McKellips and the Coburns responded in the affirmative.

The negotiations continued for almost four months and culminated in the Stock Purchase Agreement. Prior to signing the agreement, the appellants met with both Coburn Enterprises' attorney, Allen Brown, and its accountant, Clair Wuebben. The appellants were provided with a substantial amount of information concerning Coburn Enterprises, including a financial statement from June 30, 1982, which stated that "the company has not commenced production [of anhydrous alcohol] beyond the testing stage and is currently in arrears on debt obligations."

The appellants were thus aware that Coburn Enterprises was in debt and badly needed working capital. Coburn Enterprises had defaulted on a $750,000 FmHA loan--ten percent of which was held by the Bank. They knew of an additional debt of $30,000, that Coburn Enterprises had defaulted on, also owed to the Bank. In addition, they knew that the alcohol plant had operated for only a short time before an explosion in November of 1981.

The appellants retained two independent counsels, two independent accountants and a banker to advise them concerning this investment and to review the Stock Purchase Agreement. The terms of the proposed Stock Purchase Agreement were extensively revised, primarily to the appellants' benefit.

As a result of the intense negotiations, the price was reduced from $400,000 for a one-fourth stake in Coburn Enterprises to $160,000 for a one-half interest in the plant. The appellants financed this investment by borrowing $160,000 from the Bank. The loan was partially secured by a $100,000 certificate of deposit (CD). In addition, the appellants jointly and severally executed the promissory note for the $160,000 loan.

Unfortunately, the alcohol plant could not continuously produce anhydrous alcohol. It could only produce alcohol at a proof significantly lower than 197. The company was unable to market the lower proof alcohol and became insolvent. The appellants defaulted on their loan from the State Bank of Alcester. The bank foreclosed on the $100,000 CD, but the balance of the loan was not paid.

The parties discussed the possibility of executing new notes that would split the remaining part of the appellants' liability under the original note. The appellants drew up new notes. The bank rejected these new notes because they lacked collateral.

The Bank began a state court action to collect the balance due on the loan. In response, the appellants filed this federal action alleging violations of both state and federal securities laws, common law fraud, breach of fiduciary duty, and violations of the federal RICO statutes. Near the time of trial, the Bank counterclaimed for the remainder of the promissory note, and the Coburns also counterclaimed for conversion of corporate assets and breach of contract. The trial court granted the appellees' motion for summary judgment on the RICO claims before trial. During trial, the district court directed verdicts in favor of the appellees on both the state and federal securities registration claims and in favor of the appellee Bank on its counterclaim for the balance due on the loan. The securities fraud claims and other remaining claims were then submitted to the jury, which resolved all claims in favor of the appellees. The jury also found in favor of appellee Coburn Enterprises on its conversion counterclaim.

II. REGISTRATION UNDER THE FEDERAL SECURITIES ACT OF 1933

The trial court directed a verdict against the appellants on their claim that this securities offering violated federal securities registration requirements. It concluded that the offering was a private offering and exempt from registration under section 4(2) of the Federal Securities Act of 1933, 15 U.S.C. Sec. 77d(2). Our standard of review under Federal Rule of Civil Procedure 50(a) is that a verdict must be directed if, under the governing law, there can be but one reasonable conclusion as to the verdict. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986). If reasonable minds could differ as to the import of the evidence, however, a verdict should not be directed. Id. at 250-52, 106 S.Ct. at 2511-12.

The 1933 Securities Act is an attempt to provide a remedy for investment fraud and should be, therefore, liberally construed. Generally, registration is required, and the exemptions are limited by the statutory purpose. The design of the Act is to protect investors by promoting full disclosure of information thought necessary to make informed investment decisions. Thus, the applicability of the private offering exemption turns on whether the particular class of persons affected needs the protection of the Act. The burden of proof is on the issuer pleading the exemption--in this case, the appellees.

Section 4(2), the private offering exemption, exempts from registration "transactions by an issuer not involving any public offering." The determination of whether an offer is not public has not been relegated to a simple numerical test. See Securities & Exchange Com. v. Ralston Purina Co., 346 U.S. 119, 125, 73 S.Ct. 981, 984, 97 L.Ed. 1494 (1953). The question turns on the need of the offerees for the protections afforded by registration. Id. at 127, 73 S.Ct. at 985. If the offerees have access to such information, registration is unnecessary, and the section 4(2) exemption should apply. Id. If the offerees have a relationship with the offeror--such as employment, family or economic bargaining power--that enables the offerees to obtain all necessary information, the offering should also be exempt. Doran v. Petroleum Management Corp., 545 F.2d 893, 903 (5th Cir.1977).

Our review of this case leads us to the conclusion that the evidence is such that reasonable persons could only find that this offering was a private rather than a public offering. Initially there are at the outside only twelve potential offerees--the four appellants, the six Coburns, AEFS and a local realtor. As to the realtor, the evidence fails to show either that he was an offeree or that he ever...