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Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 

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FI LED 

nited States Court of Appeals UNITED STATES COURT OF APPEAL TeNh Circuit 

FOR THE TENTH CIRCUIT JUL 2 8 1992 

JOHN E. CARLSON and LINDA D. CARLSON, 

Plaintiffs-Appellees/ 

Cross-Appellants, 

v. 

BAGLEY SECURITIES, INC., a Utah 

corporation, 

and 

Defendant-Appellant/ 

Cross-Appellee, 

EDWARD DALLIN BAGLEY; EDWARD BRYAN 

BAGLEY; LISA BAGLEY; CAROLYN CREAMER 

BAGLEY, 

Defendants. 

R.OBERT L HOECKER 

) Clerk 

) 

) 

) 

) 

) Nos. 91-4104 

) & 

) 91-4109 

) (D.C. No. 89-C-1062-A) 

) ( D. Utah) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

ORDER AND JUDGMENT* 

Before MOORE, BARRETT, and BRORBY, Circuit Judges. 

After examining the briefs and appellate record, this panel 

has determined unanimously that oral argument would not materially 

assist the determination of these appeals. See Fed. R. App. P. 

* This order and judgment has no precedential value and shall 

not be cited, or used by any court within the Tenth Circuit, 

except for purposes of establishing the doctrines of the law of 

the case, res judicata, or collateral estoppel. 10th Cir. R. 

36.3. 

Appellate Case: 91-4104 Document: 010110275077 Date Filed: 07/28/1992 Page: 1
34(a); 10th Cir. R. 34.1.9. The cases are therefore ordered 

submitted without oral argument. 

Defendant Bagley Securities, Inc. (Defendant), appeals from a 

judgment awarding damages to Plaintiffs John E. and Linda D. 

Carlson for breach of contract. Plaintiffs cross-appeal, 

challenging that portion of the judgment dismissing their claims 

against Defendant under§ lO(b) of the Securities Exchange Act of 

1934, 15 U.S.C. § 78j(b), and under the Utah Uniform Securities 

Act, Utah Code Ann.§ 61-1-22(l)(b). The issues are whether the 

district court erred in concluding that Defendant breached its 

contract with Plaintiffs to deliver certificates of stock within a 

reasonable time; whether it erred in concluding that 

misrepresentations made by Defendant to Plaintiffs were not "in 

connection with" the purchase or sale of a security under§ lO(b); 

and whether it erred in concluding that the misrepresentations did 

not violate the Utah Uniform Securities Act because they occurred 

after the purchase or sale of a security. We affirm. 

The district court found that in early 1989, Plaintiffs 

became aware of a company called Dial-A-Gift through conversations 

with their broker, Robert Lorsbach, who was employed by Aesir 

Securities. Lorsbach could not execute a sale of the stock 

because Aesir was not registered to transact business in 

Minnesota, where Plaintiffs resided. He suggested Plaintiffs 

contact Todd Knowles, who could execute the sale. Knowles was 

Defendant's employee. 

In early April 1989, Plaintiffs called Knowles to inquire if 

he would purchase approximately $80,000 in Dial-A-Gift stock at 

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Appellate Case: 91-4104 Document: 010110275077 Date Filed: 07/28/1992 Page: 2
the quoted price of $4 per share. At Lorsbach's suggestion, Mr. 

Carlson told Knowles he wanted the stock certificates delivered to 

him, Mr. Carlson. Knowles agreed and told Mr. Carlson he could 

expect to receive the certificates within ten days to two weeks 

after the trade. Between April 7 and 21, 1989, Plaintiffs paid 

Defendant almost $80,000 to purchase the stock. 

Lorsbach told Knowles that Knowles could purchase the stock 

from Aesir. Knowles attempted to fill the order but could 

purchase only a portion of the shares because of tight market 

conditions. Because of this difficulty, Defendant decided to 

become a market maker1 in Dial-A-Gift and to short the remaining 

shares to Plaintiffs. Defendant sold Plaintiffs 17,500 shares of 

Dial-A-Gift stock, 4,700 of which were purchased from other market 

makers, and 12,800 of which were shorted to Plaintiffs from 

Defendant's trading account. Lorsbach was aware that Defendant 

intended to short the shares. Lorsbach's knowledge was imputed to 

Plaintiffs. 

Plaintiffs became concerned when they had not received the 

certificates by early May 1989. 

Knowles to explain the delay. 

certificates were on their way. 

Mr. Carlson repeatedly asked 

Mr. Carlson was assured the 

In a May 23, 1989, letter, 

Defendant informed Plaintiffs that it had purchased 17,500 shares 

1 A market maker, as the term is used in this case, is "any 

dealer who, with respect to a security, holds himself out (by 

entering quotations in an inter-dealer communications system or 

otherwise) as being willing to buy and sell such security for his 

own account on a regular or continuous basis." 15 u.s.c. 

§ 78c(a) (38). 

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of the stock from Midwest Clearing Corporation and Plaintiffs 

would receive the securities as soon as Defendant received them 

from Midwest. 

When Plaintiffs still had not received the certificates as of 

June 20, 1989, they wrote a letter demanding delivery within five 

days. Defendant's counsel responded by alleging that a fraudulent 

distribution of Dial-A-Gift shares had occurred and stating that 

Defendant would not deliver the certificates until those 

allegations were disproved. Defendant did not offer to return 

Plaintiffs' money. 

After Plaintiffs commenced this action in November 1989, 

Defendant transferred 17,200 shares into Plaintiffs' account. 

Plaintiffs refused delivery because the price quotes for the 

shares had significantly dropped. 

Defendant challenges the district court's determination that 

Plaintiffs were entitled to rescission because Defendant breached 

its contract to deliver the certificates to Plaintiffs within a 

bl t . 2 reasona e ime. Defendant argues that Plaintiffs lost nothing 

by not having possession of the certificates. 

A party is entitled to rescission and restitution where there 

has been a material breach of the contract by the other party. 

Polyglycoat Corp. v. Holcomb, 591 P.2d 449, 451 (Utah 1979). A 

failure of performance which "'defeats the very object of the 

2 The district court 

intent to short the 

contract for Defendant 

reasonable time. 

found that Plaintiffs knew of Defendant's 

shares, and that the parties had an oral 

to deliver the certificates within a 

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contract'" or "'is of such prime importance that the contract 

would not have been made if default in that particular had been 

contemplated'" is a material breach. Id. (quoting Havas v. Alger, 

461 P.2d 857, 862 (Nev. 1969)). 

The evidence indicates that Plaintiffs invested to make a 

profit, not to get certificates. It was undisputed that they 

could have sold the shares although they did not have physical 

possession of the certificates. They were unable to identify any 

economic loss they suffered because they did not obtain the 

certificates. 

However, the district court concluded that Plaintiffs were 

entitled to rescission under Utah Stat. Ann.§ 70A-8-316, which 

provides 

Unless otherwise agreed, the transferor of a 

certificated security or the transferor, pledgor, or 

pledgee of an uncertificated security on due demand must 

supply his purchaser with any proof of his authority to 

transfer, pledge, or release or with any other requisite 

necessary to obtain registration of the transfer, 

pledge, or release of the security .... Failure 

within a reasonable time to comply with a demand made 

gives the purchaser the right to reject or rescind the 

transfer, pledge, or release. 

On its face, this section requires only a failure within a 

reasonable time to comply with a demand, rather than a showing of 

a material breach, to entitle a purchaser to rescission. 

Defendant has not argued that the district court misapplied this 

section, and we are not required to manufacture its argument. 

National Commodity & Barter Ass'n v. Gibbs, 886 F.2d 1240, 1244 

(10th Cir. 1989). Defendant waived any error in the district 

court's application of this section. 

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Defendant challenges the district court's finding that 

Defendant failed to prove it was impossible to perform the 

contract. Defendant's owner and principal testified that he could 

have acquired the shares to cover the short sale if he had paid 

enough money. The district court's finding to this effect is not 

clearly erroneous. 

Defendant contends that it delivered the certificates within 

a reasonable time, in light of the tightness of the market and its 

domination by Aesir Securities. Section ?0A-8-316 provides no 

standards for determining what is a reasonable time for delivery, 

and Defendant has not suggested any, much less indicated our 

standard of review. See 10th Cir. R. 28.2(c). Again, we will not 

manufacture Defendant's argument for Defendant. National 

Commodity & Barter Ass'n, 886 F.2d at 1244. We therefore affirm 

the judgment as to the breach of contract claim. 

Plaintiffs argue that the district court erred in concluding 

that the following misrepresentations were not actionable under 

§ l0(b) and 17 C.F.R. § 240.l0b-5 (Rule l0b-5): 1) Knowles' 

statement that the certificates would be delivered within ten days 

to two weeks after the trade; 2) Defendant's May 23, 1989, letter 

stating that Defendant had purchased 17,500 shares of stock 

through Midwest Clearing Corporation; 3) Defendant's counsel's 

July 5, 1989, letter stating that Defendant would not deliver the 

certificates because of a fraudulent distribution; and 4) an 

October 31, 1989, letter from Defendant's counsel to Midwest 

Clearing Corporation stating that delivery of the certificates 

would violate the Securities Act. 

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Section lO(b) provides that it is unlawful "[t]o use or 

employ, 

security 

in connection with the purchase or sale of any 

. any manipulative or deceptive device or 

contrivance" in violation of Securities and Exchange Commission 

(SEC) rules and regulations. Rule 

provides that it is unlawful 

(a) To employ any device, scheme, or artifice to 

defraud, 

(b) To make any untrue statement of a material fact or 

to omit to state a material fact necessary in order to 

make the statements made, in the light of the 

circumstances under which they were made, not 

misleading, or 

(c) To engage in any act, practice, or 

business which operates or would operate as a 

deceit upon any person, 

course of 

fraud or 

in connection with the purchase or sale of any security. 

lOb-5 

The district court found that Knowles' representation that 

the certificates would be delivered in ten days to two weeks was 

not false. A court's findings of fact in a case tried without a 

jury "shall not be set aside unless clearly erroneous, and due 

regard shall be given to the opportunity of the trial court to 

judge the credibility of the witnesses." Fed. R. Civ. P. 52(a). 

The evidence shows that, at the time the statement was made, 

Knowles thought he could purchase the stock from Aesir. It was 

only when he tried to make the purchase that he discovered it 

would be difficult to purchase more than a few hundred shares. 

The district court's finding concerning the first statement is not 

clearly erroneous. 

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The district court found that the remaining three statements 

were false. Plaintiffs argue that the district court erred in 

concluding that these misrepresentations were not made "in 

connection with" the purchase under§ lO(b) and Rule lOb-5. To 

prove a violation of Rule lOb-5, a plaintiff must establish that 

the defendant made a misrepresentation of a material fact upon 

which the plaintiff justifiably relied to his or her detriment. 

Grubb v. FDIC, 868 F.2d 1151, 1162 (10th Cir. 1989). There must 

be a causal connection between the misrepresentations and the 

plaintiff's injury. Carlson admitted that nothing 

Defendant did caused 

Id. 

him 

Mr. 

to buy Dial-A-Gift stock. Appellee's 

App. at 6. The district court correctly concluded that the 

misrepresentations were not made in connection with the purchase 

of securities. 

Plaintiffs next argue that they established a violation of 

the Utah Uniform Securities Act. Section 61-1-22(1) makes anyone 

who offers a security by means of any untrue statement of material 

fact liable to the purchaser. The district court concluded that 

Plaintiffs had not shown a violation of section 61-1-22(1) because 

the misrepresentations occurred after the purchase. 

S & F Supply Co. v. Hunter, 527 P.2d 217, 221 (Utah 

1974)(footnote omitted), held that, under section 61-1-22(1), "a 

buyer need only show by a preponderance of the evidence that in 

making the sale the seller made an untrue statement or omission 

concerning a material fact; and that the buyer did not know of the 

untruth or omission." The court further explained that a material 

fact under this section "must be something which a buyer or seller 

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of ordinary intelligence and prudence would think to be of some 

importance in determining whether to buy or sell." S & F Supply 

Co., 527 P.2d at 221 (emphasis added)(footnote omitted). This 

indicates that the misrepresentation must be made before the buyer 

decides to buy. The misrepresentations in this case all occurred 

after Plaintiffs decided to buy the stock, and none played any 

role in Plaintiffs' decision to buy the stock. The district court 

correctly determined there was no violation of section 61-1-22(1). 

The judgment of the United States District Court for the 

District of Utah is AFFIRMED. 

Entered for the Court 

John P. Moore 

Circuit Judge 

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