Vincent v. Moench

• Decision Date: 23 March 1973
• Docket Number: No. 72-1184.,72-1184.
• Citation: 473 F.2d 430
• Parties: Ruth F. Howells VINCENT et al., Plaintiffs-Appellants, v. Lorin L. MOENCH et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

473 F.2d 430 (1973)

Ruth F. Howells VINCENT et al., Plaintiffs-Appellants, v. Lorin L. MOENCH et al., Defendants-Appellees.

No. 72-1184.

United States Court of Appeals, Tenth Circuit.

January 26, 1973.

Rehearing Denied March 23, 1973.

Daniel L. Berman, Salt Lake City, Utah (Mary Lou Godbe, Salt Lake City, Utah, on the brief), for appellants.

C. Keith Rooker, Salt Lake City, Utah (Dale A. Kimball, Salt Lake City, Utah, on the brief), for appellees.

Before MURRAH, BREITENSTEIN and McWILLIAMS, Circuit Judges.

MURRAH, Circuit Judge.

This litigation centers around another internecine struggle over a valuable family estate. Ruth F. Howells Vincent and the other plaintiffs, individually and derivatively on behalf of defendant Howells Livestock, Inc., seek private equitable relief under Section 10(b) of the Securities Exchange Act of 1934, 15 U. S.C. § 78j(b), and its implementing Rule 10b-5, 17 C.F.R. § 240.10b-5 (1964) for injuries caused by defendants' alleged scheme to defraud plaintiffs in connection with the purchase and sale of interests in certain family businesses. Section 10(b) and Rule 10b-5 provide in presently material part that it shall be unlawful for any person to use any instrumentality of interstate commerce to employ any scheme or device which would operate as a fraud or deceit upon any person "in connection with the purchase or sale of any security." Jurisdiction is asserted under Section 27 of the Securities Exchange Act of 1934, 15 U. S.C. § 78aa, providing for the bringing of suits in equity or at law in federal court for enforcement of any liability or duty created by the Act or the rules and regulations promulgated thereunder.

The basic and operative facts are these. Howells Livestock, Inc. is a Utah corporation owning approximately 40,000 acres of ranch land and additional related grazing and forest permits, which it leases to livestock operators. David P. Howells founded the company more than 50 years ago, and upon his death in 1952 left its ownership in equal shares to his three children, Paul S. Howells, Barbara Howells Moench, and Francis Howells West. The children and their spouses subsequently formed a partnership which they called Thousand Peaks Livestock Company, to operate a livestock business on lands owned or controlled by Howells Livestock, Inc. Under this arrangement each family owned a one-fourth interest in the operating partnership, with the parent corporation, Howells Livestock, Inc., owning the remaining one-fourth. In 1959 the Paul S. Howells family and the Moench family purchased the West family's one-fourth share of the operating partnership, and enough of the parent corporation's share in the partnership to leave it only a 2%, but vital, interest. At the time of Paul S. Howells' death in an airplane accident in 1961, then, the operating partnership was owned 49% by the Paul S. Howells family, 49% by the Moench family, and 2% by the parent corporation. At this juncture it is important to keep in mind that the parent corporation was owned one-third by the Paul S. Howells family, one-third by the Moench family and one-third by the West family, and whoever gained control of the parent corporation also controlled its key 2% interest in the operating partnership.

The plaintiff Ruth F. Howells Vincent, recently remarried, is the widow of Paul S. Howells, the remaining individual plaintiffs are Paul S. Howells' children, and Zions First National Bank is trustee of a trust created by Paul S. Howells' last will and testament. Defendant Barbara Howells Moench was the sister of Paul S. Howells and is married to defendant Lorin L. Moench, who since 1961 has been the senior male relative of the individual plaintiffs and the dominant influence in both the operating partnership and the parent corporation.

Following Paul S. Howells' death, Lorin L. Moench purchased the West family's one-third interest in the parent corporation, thereby obtaining control of that company and its controlling 2% share of the operating partnership. Shortly thereafter, Moench also purchased the Paul S. Howells family's 49% interest in the operating partnership, thereby assuming undisputed ascendency over both enterprises. The complaint alleges that Moench used instrumentalities of interstate commerce to implement a scheme to defraud the plaintiffs in connection with the latter transactions. The contention is that Moench's purchase of parent company stock from the West family, who are not parties to this action, was part of a plan to "loot and plunder" that company, and that the consequence of Moench's scheme has been to deprive plaintiffs of the benefits of the ownership of their one-third of the stock of the parent company. It is further alleged that Moench subsequently used this newly acquired control of the parent company, and the attendant 2% controlling share of the operating partnership, to coerce Ruth Howells Vincent to sell him her family's 49% interest in the partnership. The plaintiffs joined additional pendant state claims alleging breaches of corporate fiduciary duties by the defendants.

Relying on Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir. 1952), cert. denied, 343 U.S. 956, 72 S.Ct. 1051, 96 L.Ed. 1356 (1952), the trial court granted Moench's motion to dismiss on the ground that the plaintiffs were not buyers or sellers of a security within the meaning of Section 10(b) of the Securities Exchange Act or Rule 10b-5, and that the court was, therefore, without subject matter jurisdiction. On appeal the plaintiffs insist that Superintendent of Insurance v. Bankers Life & Cas. Co., 404 U.S. 6, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971), heralded the complete demise of the former caselaw requirement that to invoke the protection of the Act in a case of this kind the plaintiffs must be buyers or sellers of a security, and further allege that, in any event, the plaintiffs' sale of their 49% interest in the operating partnership to Moench was the sale of a security within the meaning of the Act. In this posture of the case all facts well pleaded must be taken as true, both in the trial court and on appeal. For reasons we shall more fully state, we affirm the trial court's decision.

The Securities Exchange Act was enacted following the excesses of the late 1920's for the protection of the public against "predatory operations" of corporate insiders. See, e.g., S.Rep. No. 1455, 73d Cong., 2d Sess. 68 (1934). The salient purpose of the Act is ". . . to give the investing public the opportunity to make knowing and intelligent decisions in the purchase or sale of securities." See Kahan v. Rosenstiel, 424 F.2d 161 (3d Cir. 1970). See also, e.g., S.E. C. v. Capital Gains Bureau, 375 U.S. 180, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963). To that end "§ 10(b) bans the use of any deceptive device in the `sale' of any security by `any person,'" regulated or unregulated, "whether conducted in the organized markets or face to face." Superintendent of Insurance v. Bankers Life & Cas. Co., supra, 404 U.S. at 10 and 12, 92 S.Ct. at 168 and 169. And it provides a private right of action, as well as enhancing the SEC's enforcement powers. See, e.g., Bankers Life, supra at 13 n. 9, 92 S.Ct. 165. However, Birnbaum admittedly limited the scope of the Act's protection to defrauded buyers and sellers of securities. In that case the complaint alleged that the defendant had sold his controlling block of shares to another corporation, which had paid the defendant a premium so it could use control for purposes detrimental to the plaintiffs, minority shareholders in the sold corporation. Under facts not demonstrably unlike ours, the Court of Appeals expressly stated that while Rule 10b-5 "may have been somewhat loosely drawn," it "extended protection only to the defrauded purchaser or seller." 193 F.2d at 463-464. We have inferentially approved Birnbaum under facts clearly distinguishable from our case. See, e.g., Horwitz v. Panhandle Eastern Pipe Line Co., 438 F.2d 53 (10th Cir. 1971); and Knauff v. Utah Construction & Mining Co., 408 F.2d 958 (10th Cir. 1969). Following another Second Circuit case, however, we did recognize that the words "purchase or sale must be defined broadly" (see Knauff v. Utah Construction & Mining Co., supra at 961) and that they include an exchange of shares (see Knauff, supra, and Vine v. Beneficial Finance Company, 374 F.2d 627 (2d Cir. 1967)).

Indeed, in their brief defendants recognize a relaxation of the Birnbaum requirements since it was decided in 1952. In Vine the parties assumed the vitality of Birnbaum, but, specifically leaving open the question in our case, the Second Circuit liberally construed "purchase or sale" to hold that minority shareholders, who had not bought or sold securities but were faced with an unwanted merger, were forced sellers and were, therefore, entitled to maintain an action under the Act. In another case by the same court a few months later, Mutual Shares Corporation v. Genesco, Inc., 384 F.2d 540 (2d Cir. 1967), a claim for injunctive relief alleging that defendants manipulated the market value of stock by keeping dividend payments at a minimum in order to force minority shareholders to sell at depressed prices, was held actionable under Rule 10b-5, while a claim for damages was dismissed. The only "sale" in connection with the alleged fraud in that case was the purchase by defendants of stock from persons not parties to the suit. Without referring to Birnbaum, the court did "not regard the fact the plaintiffs have not sold their stock as controlling on the claim for injunctive relief." And see also Kahan v. Rosenstiel, supra. In Iroquois Industries, Inc. v. Syracuse, 417 F.2d 963 (2d Cir. 1969), however, the Second Circuit specifically reaffirmed the continuing vitality of Birnbaum.

Although Birnbaum has been both questioned¹ and supported,² the recent trend is undoubtedly toward the more liberal view. In Bankers Life the Court of Appeals had affirmed...