Viernow v. Euripides Development Corp.

• Decision Date: 14 September 1998
• Docket Number: No. 96-4153,96-4153
• Citation: 157 F.3d 785
• Parties: 98 CJ C.A.R. 5086 Joseph VIERNOW, Plaintiff-Appellant, v. EURIPIDES DEVELOPMENT CORPORATION, dba Transworld Telecommunications, Inc., Ronald A. Kempin, Kevin M. Kempin, Manuel C. Martinez, J.B. Bottom & Associates, Karl N. Holley, American Registrar And Transfer Co., and First Eagle, Defendants-Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 785

157 F.3d 785

98 CJ C.A.R. 5086

Joseph VIERNOW, Plaintiff-Appellant, v. EURIPIDES DEVELOPMENT CORPORATION, dba Transworld

Telecommunications, Inc., Ronald A. Kempin, Kevin M. Kempin,

Manuel C. Martinez, J.B. Bottom & Associates, Karl N.

Holley, American Registrar And Transfer Co., and First

Eagle, Defendants-Appellees.

No. 96-4153.

United States Court of Appeals, Tenth Circuit.

Sept. 14, 1998.

H. Dawson French of French & Hamilton, Dallas, TX, for Plaintiff-Appellant.

Alexander R. Dahl (James M. Elegante and Scott R. Carpenter with him on the brief), of Parsons Behle & Latimer, Salt Lake City, UT, for Defendants-Appellees.

Before EBEL and HOLLOWAY, Circuit Judges, and BLACK, District Judge. ^*

HOLLOWAY, Circuit Judge.

Plaintiff-appellant Joseph Viernow brought this suit against Euripides Development Corporation (the Corporation) ¹ and its three founders, alleging various state law securities and trade practices violations as well as negligence arising out of Viernow's inability to exercise certain stock warrants. The district court granted summary judgment in favor of defendants on all counts, and this appeal followed. We have jurisdiction under 28 U.S.C. § 1291, and affirm.

I. Background

A

The Corporation was organized under the laws of Pennsylvania in December 1987, and its principal place of business is in Salt Lake City, Utah. Aplt.App. at 64, 73. In February 1988, the Corporation filed a registration statement with the Securities and Exchange Commission (SEC) for the sale of a maximum of 12,500,000 of the Corporation's "units" at an offering price of $.02 each. Id. at 65, 93. Each unit consisted of one share of common stock, one "A" warrant and one "B" warrant of the Corporation. Id. at 65. Subject to certain conditions precedent described more fully below, holders of "A" warrants were entitled to acquire one share of common stock at $.03 per share and holders of "B" warrants were entitled to acquire one share of common stock at $.05 per share. Id.

Additionally, the warrants contained a notation, in a typesetting consistent with the other language appearing on such warrants, that the "Warrant shall not be exercised by holder in any state where such exercise would be unlawful such as a state in which the Company's common stock is not registered. The Company will not attempt to qualify the shares represented by this Warrant for sale in jurisdictions where holders of the Company's Warrants reside, unless done as a part of the initial registration of its securities." Id. at 158-159. Further, as stated on their face, the "A" warrants expired on December 31, 1988, and the "B" warrants expired on June 30, 1988. Id. However, after a series of extensions by way of corporate resolutions, the warrants were finally deemed to expire on February 28, 1994. Id. at 160-166.

The units were registered with the SEC and various states other than Texas for sale to the public, and the units were sold until June 1989. ² Aple. Supp.App. at 2. The initial, and only, public offering was completed in July 1989 when the Corporation's underwriter completed the sale of all 12,500,000 units to the public. Id. at 5. None of the stock offered in the initial public offering was sold in Texas. Id. Throughout the duration of the public offering, the registration statement, which included the prospectus, ³ was on file with the SEC. Id. at 2.

Viernow, a resident of Arlington, Texas, purchased a total of 315,000 units on the secondary market ⁴ in Texas in a series of three transactions: (1) on December 15, 1989, Viernow purchased 200,000 units at a price of $.04 per unit; (2) on January 12, 1990, he purchased 85,000 units at a price of $.04 per unit; and (3) on January 25, 1990, he purchased 30,000 units at a price of $.04 per unit. Aplt.App. at 152, 155-157. In addition to $30 in fees, Viernow paid a total of $12,600 for the units. Id. at 152. All such purchases were made through Al Turinsky of West Coast Securities, Inc., a now defunct brokerage firm in Dallas. Id. At the time of the purchases, the Corporation's stock was not listed on any national exchange, and the units were traded "over the counter." Id. at 66. Each of Viernow's units consisted of one share of common stock, one "A" warrant and one "B" warrant. Id. at 152-53. In his affidavit, Viernow stated that he did not receive a prospectus at the time of the purchases and he had no knowledge of any restrictions on the sale of the units to residents of Texas. Id. at 153.

On March 2, 1992, the Corporation approved a reverse stock split of ten for one of all the issued and outstanding shares. The stock split was approved for the purpose of enhancing the marketability of shares if a secondary market were to develop. Id. at 184. The reverse split thus reduced the common stock owned by Viernow from 315,000 shares to 31,500 shares. Additionally, the underlying common stock which could be purchased upon the exercise of his warrants, assuming satisfaction of certain conditions precedent, was similarly reduced from 315,000 shares to 31,500 shares for each warrant class, for a total of 63,000 shares. As a result of the reverse split, each "A" warrant provided a contingent right to purchase one share of common stock at $.30 per share, and each "B" warrant provided a contingent right to purchase one share of common stock at $.50 per share. Id.

In late summer of 1993, Viernow asked his broker, Ed Clark of Dallas, to determine the value of his stock and warrants. Id. at 153. Clark advised Viernow that each share was worth approximately $3.00, but that he could not sell the warrants until they were registered. Id. In September 1993, Viernow received a form letter from the Corporation stating that "In the near future, the Company intends to submit the necessary filings with the [SEC] and other regulatory agencies so that the A & B Warrants can be exercised." Id. at 185. The letter concluded with the statement that "Although there is no assurance, a public trading market may develop for the warrants." Id. Viernow sold his 31,500 shares of stock through Clark in October 1993 at a price of $3.25 per share, but the warrants were not sold. Id. at 124, 153.

During that time period, both Viernow and Clark contacted representatives of the Corporation, and they were advised that the warrants could not be exercised until registered, but that such registration was probably imminent. Id. at 123-124, 154. Viernow asserts that the Corporation's stock sold for a high of $6.75 per share at the time in which he was attempting to exercise his warrants. Id. at 154, 187. As noted above, the Corporation finally allowed the warrants to expire on February 28, 1994, after several extensions. Id. at 160-169. The Corporation never registered any shares underlying the warrants, citing limited resources as well as the expense and effort required to effectuate a public offering. Id. at 66. Thus, none of the warrant holders were able to exercise their warrants. Aplt.App. Tab 18 at 12.

B

Upon learning that the warrants had expired, Viernow commenced the present suit in January 1995 in the 192nd District Court in Dallas County, Texas, against the Corporation, and its three founders, as well as its attorney, accountant, underwriter and transfer agent associated with the initial public offering. Aplt.App. at 6. Aside from the Corporation and the three founders, the other defendants were not served or were non- suited. Appellant's Brief at 8. In his complaint, Viernow alleged: (1) violations of the Texas Deceptive Trade Practices Act, ⁵ (2) violations of the Texas Securities Act, (3) negligence in failing to insure that the units were not sold to Texas residents, (4) conspiracy to not register the common stock underlying the warrants, (5) breach of duty of due care and fair dealing, and (6) the restrictions and limitations on the warrants are void as restraints on trade. ⁶ Aplt.App. at 12-17. In February 1995, defendants removed the present case to the United States District Court for the Northern District of Texas under diversity jurisdiction. Aplt.App. at 1. ⁷ In January 1996, pursuant to defendants' motion, the district court transferred the case to the United States District Court for the District of Utah. ⁸ Aplt.App. at 1, 3.

C

In March 1996, defendants filed a motion for summary judgment and brief in support. Aplt.App. at 45-48. Viernow responded to the motion, attempting to raise several issues for the first time: ⁹ (1) the warrant restrictions which prohibited Viernow from exercising his warrants are invalid under Utah law since they are not conspicuously noted; (2) the directors of the Corporation breached their fiduciary duty to warrant holders by wrongfully refusing to register the stock underlying the warrants or allow Viernow to exercise them; ¹⁰ (3) the Corporation should be estopped from asserting that the warrants expired in light of repeated representations that the warrants would be registered and Viernow would be able to exercise them; (4) defendants never actually intended to allow Viernow to exercise the warrants; (5) the directors had a conflict of interest "in refusing to register the Warrants or allow exercise thereof and thereby avoid any dilution which would have been suffered by them in their stock ownership in the Corporation if the Warrants were exercised;" and (6) the Corporation, by failing to take steps to insure that the warrants were not sold to Viernow in Texas, "affirmed such state and delivery and waived any right it might have had to refuse to register Plaintiff's Warrants or to prohibit him from exercising them." Aplt.App. at 103-104.

On August 12, 1996, the district court heard argument on defendants' summary judgment motion. At the hearing Viernow raised another issue for the first time, i.e., that because the Corporation was incorporated under the laws of Pennsylvania, Pennsylvania law required the warrant restrictions to be conspicuously noted. Aplt.App. Tab 18 ...