Wright v. National Warranty Co.

• Citation: 953 F.2d 256
• Decision Date: 09 January 1992
• Docket Number: No. 90-6467,90-6467
• Parties: , Fed. Sec. L. Rep. P 96,466 Robert E. WRIGHT; Barbara J. Wright, Plaintiffs-Appellants, v. NATIONAL WARRANTY COMPANY, L.P.; National Warranty, Inc.; Bumper to Bumper Program, Inc.; AI Automotive Corporation; Rose, Jackson, Brouillette & Shapiro; W. Thomas Boothe; Lee Synnott; Leonard Rose, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

Page 256

953 F.2d 256

60 USLW 2480, Fed. Sec. L. Rep. P 96,466

Robert E. WRIGHT; Barbara J. Wright, Plaintiffs-Appellants, v. NATIONAL WARRANTY COMPANY, L.P.; National Warranty, Inc. Bumper to Bumper Program, Inc.; AI Automotive Corporation Rose, Jackson, Brouillette & Shapiro; W. Thomas Boothe Lee Synnott; Leonard Rose, Defendants-Appellees.

No. 90-6467.

United States Court of Appeals Sixth Circuit.

Argued Aug. 2, 1991.

Decided Jan. 9, 1992.

Gerald A. Smith, Jr., Blackburn, Little, Smith & Slobey, Nashville, Tenn. (argued and briefed), for plaintiffs-appellants Robert E. and Barbara J. Wright.

Frank S. King, Jr. (argued), John H. Yardley (briefed), King & Ballow, Nashville, Tenn., for defendants-appellees Nat. Warranty Co., L.P., Nat. Warranty, Inc., Bumper to Bumper Program, Inc., AI Auto. Corp., Rose, Jackson, Brouillette & Shapiro, W. Thomas Boothe, Lee Synnott and Leonard Rose.

Before NELSON and SUHRHEINRICH, Circuit Judges, and HOLSCHUH, Chief District Judge ^*.

SUHRHEINRICH, Circuit Judge.

Plaintiffs Robert and Barbara Wright appeal from the district court's grant of summary judgment in favor of defendants in this federal securities action. For the reasons that follow, we affirm in part, reverse in part and remand.

I.

This case involves the transaction by which plaintiffs were sold equity interests in defendant National Warranty Company, L.P., ("NWP") and National Warranty, Inc. ("NWC"). NWC was formed for the purpose of implementing a program which would offer to small independent or regional companies lifetime warranties on automobile repair parts and labor competitive with warranties offered by national corporations. NWC planned to sell the warranty certificates to warehouse distributors who owned $100,000 in equity interests. The warehouse distributors would sell warranty coverage to consumers, who then would be able to redeem their lifetime warranties from any NWC dealer, who would in turn seek reimbursement from NWC.

It was determined that the proposed program would need $6,000,000 in funding. Of this amount, $2,000,000 was to be raised through the sale of stock in the new corporations, to be priced in $100,000 units. The remaining $4,000,000 was to be raised by the sale of lifetime warranty certificates to warehouse distribution facilities, such purchases being made prior to the facilities actively offering the certificates for sale.

The terms and conditions of the offering were set forth in the Private Placement Memorandum ("PPM") (a prospectus), dated November 21, 1988. Contained within the PPM were various proforma financial statements, including a "Proforma Income Statement," "Proforma Cash Flow," "Certificate Sales," "Dealer Enrollment Assumptions," and "Dealers Sold." Under the category marked "RISK FACTORS," PPM stated in part:

The market for or demand for the Partnership's product is unknown. The Financial Exhibits have been prepared based upon certain assumptions concerning sales, as set forth therein. However, the level of sales assumed in the Financial Exhibits may not be obtained or obtainable, which would adversely affect the economic performance of the Partnership.

NWC decided to hire a financial officer to handle its affairs. On December 20, 1988, plaintiff Robert Wright was interviewed for a job as Vice-President of Finance ("VPF") and Chief Financial Officer ("CFO") of NWC. At the interview plaintiff received a copy of the PPM. He was hired on December 28, 1988, and began work on January 3, 1989. As VPF and CFO, Wright was personally responsible for preparing the monthly profit and loss statements, cash flow statements, and balance sheets. Plaintiff also approved and signed all stock certificates, invoices, and wrote and signed all checks. He was also responsible for the collection efforts of NWC. In his capacity as Secretary and Treasurer, plaintiff attended all meetings of the Board of Directors of NWC. He also revised the income statement set forth in the PPM several times.

On March 29, 1989, approximately three months after he began employment, plaintiff and his wife purchased a $100,000 unit of NWC securities, which are the subject of this litigation.

By May 3, 1989, AI, NWC's largest proposed customer, informed NWC that it would not purchase more than the one $100,000 unit of NWC's repair warranty certificates it had already purchased. Even though AI had not contractually committed to do so, NWC had anticipated and relied in its projections on the fact that AI would purchase twelve additional $100,000 units of NWC's certificates. On May 17, 1989, a special meeting of NWC's board was held. Wright attended and briefed the directors on NWC's financial status. In his affidavit Wright stated that at this meeting he was informed for the first time that AI never committed to invest $100,000 per warehouse; and further that all of the Board understood that AI had no legal commitment to make such an investment.

Plaintiff attended another Board meeting on June 20, 1989. At that meeting, he allegedly demanded that his investment be returned, stating that had he been aware of AI's lack of commitment to the warranty program and financial difficulties, he would never have purchased the securities. On July 4, 1989, plaintiff was terminated due to the financial difficulties of NWC. At that time, he formally tendered his securities and demanded a refund of his investment.

Plaintiffs brought suit on March 27, 1990, alleging inter alia, violation of the federal securities laws, including: (1) section 12(1) of the Securities Act of 1933 ("the Act"), 15 U.S.C. § 77l (1), based on defendants' offering and selling securities which were not registered with the Securities and Exchange Commission ("SEC") and which did not meet the requirements necessary to exempt them from registration; (2) section 12(2) of the Act, 15 U.S.C. § 77l (2), based on allegedly untrue statements or omissions of material fact in written and oral communications made by defendants to plaintiffs; (3) section 10(b) of the Securities Exchange Act of 1934 ("the Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder; and violation of section 17(a) of the Act, 15 U.S.C. § 77q(a).

The district court granted defendant's motion for summary judgment on the grounds that Robert E. Wright's status as an "insider" and his access to information precluded any recovery under the Act and the Exchange Act; and that defendants qualified for an exemption from registration pursuant to section 4(2) of the Act, 15 U.S.C. § 77d(2). This appeal followed.

II.

A.

Plaintiffs argue that the district court erred in concluding as a matter of law that the securities offered and sold by defendants qualified for an exemption from registration with the SEC. The district court found that defendants met their burden of proving that they qualified for an exemption from registration pursuant to section 4(2) of the Act, 15 U.S.C. § 77d(2), and 17 C.F.R. § 230.501-508, Regulation D, by making the requisite filings with the appropriate federal and state authorities.

Section 12(1) of the Act provides in part that "any person who ... offers or sells a security in violation of Section 77e of this title shall be liable to the person purchasing such security from him," and authorizes appropriate remedies for such violation. 15 U.S.C. § 77l (1). Section 5 of the Act, 15 U.S.C. § 77e, in turn makes it unlawful for any person, directly or indirectly, to make use of any means of communication in interstate commerce or the mails to sell such security through the use or medium of any prospectus unless a registration statement for such security has been filed with the SEC.

The Act also creates exemptions to the registration requirements. Section 4(2) of the Act provides that the provisions of section 77e shall not apply to "transactions by an issuer not involving any public offering", 15 U.S.C. § 77d(2); and "transactions involving offers or sales by an issuer solely to one or more accredited investors, if the aggregate offering price of an issue of securities ... does not exceed [$5,000,000]." Id. § 77d(6). Furthermore, pursuant to section 3(b) of the Act, 15 U.S.C. § 77c(b), the SEC has promulgated Regulation D, 17 C.F.R. 230.501-508, which establishes various "safe harbor" rules for offerings that satisfy conditions sufficient to invoke the section 4(e) exemption. Rule 505 of Regulation D provides as follows:

§ 230.505 Exemption for limited offers and sales of securities not exceeding $5,000,000.

(a) Exemption. Offers and sales of securities that satisfy the conditions in paragraph (b) of this section by an issuer that is not an investment company shall be exempt from the provisions of section 5 of the Act under section 3(b) of the Act.

(b) Conditions to be met-(1) General conditions. To qualify for exemption under this section, offers and sales must satisfy the terms and conditions of §§ 230.501 and 230.502.

(2) Specific conditions-(i) Limitation on aggregate offering price. The aggregate offering price for an offering of securities under this § 230.505, as defined in § 203.501(c), shall not exceed $5,000,000, less the aggregate offering price for all securities sold within the twelve months before the start of and during the offering of securities under this section in reliance on any exemption under section 3(b) of the Act or in violation of section 5(a) of the Act.

(ii) Limitation on number of purchasers. There are no more than or the issuer reasonably believes that there are no more than 35 purchasers of securities from the issuer in any offering under this section.

Rule 501 of Regulation D sets forth definition and terms used in Regulation D. Rule 501(a) defines the term "accredited investor" as follows:

(a) Accredited investor. Accredited investor shall mean any person who comes within any of the following categories, or who the issuer reasonably believes comes within any of the following categories, at the time of the sale of...