Court Opinion

ID: 9461847
Source: CourtListenerOpinion
Date Created: 2023-08-04 22:26:01.6777+00
Date Added: 2024-06-11T17:37:17.537877
License: Public Domain

BRUCE R. THOMPSON, District Judge
(concurring).
I concur, albeit reluctantly, in the opinion of Chief Judge Chambers. My reluctance stems from a belief that the District Judge was “sandbagged” by the presentation made by counsel on the motions for summary judgment.
Plaintiffs’ amended complaint presented two basic claims for relief, a claim under Section 5 of the Securities Act of 1933 alleging a sale by defendants of unregistered securities (15 U.S.C. §§ 77e and 777) and a claim under Section 10b and Rule 10b — 5 of the Securities Exchange Act of 1934 alleging fraud and misrepresentation in the sale of the securities (15 U.S.C. § 78(j)). Initially, a motion by defendants to dismiss the complaint was denied.
On November 27, 1972, the parties filed a joint pretrial statement. Pertinent admissions and claims are as follows:
“3. Undisputed facts: On February 15, 1971, when defendants made their offer to plaintiffs, defendants were ‘insiders’ as defined by the Securities Act of 1934. Defendants were directors and officers of FTI and BASIC RESOURCES CORPORATION. They did make the offer to compromise plaintiffs’ claims and the offer was accepted. No certificates were in fact delivered. It is admitted the securities offered to plaintiffs were not registered with the Security & Exchange Commission though they were within the registration requirements of the 1933 Act. Plaintiffs stand ready, willing and able to execute formal releases as plaintiffs have promised, though they have not as yet executed such a formal release.
“4. Disputed factual issues: Plaintiffs contend defendants failed to disclose the weak financial position of BASIC RESOURCES CORPORATION at the time the offer to sell the securities was made. Had the disclosure been made, plaintiffs would not have accepted the offer.
“5. Relief prayed: Plaintiffs’ promise to release their claims was worth $10,000, and each plaintiff seeks that sum from defendants. Under the failure to register theory, plaintiffs are entitled to the agreed value of their released claim, to wit: $10,000.
6. Points of law: Liability under the failure to register, theory is absolute. The defendants made an offer to sell securities subject to registration, though they were not; the value paid was a release of the claim of $10,-000, and plaintiffs’ remedy for failure to register has not been barred by the Statute of Limitations.
*1074“Loss, Security Regulations, Volume 3, Chapter 11c, p. 1693.
“The crucial point of law is whether plaintiffs have been damaged at all. Plaintiffs contend their promise to release their claim constitutes consideration and therefore entitles plaintiffs to a recovery of $10,000 from defendants.” (Emphasis added.)
On May 4, 1973, plaintiffs filed a motion for summary judgment directed solely to the Section 5 claim, the sale of unregistered securities. By affidavit in support of the motion, plaintiffs reaffirmed their position: “In the present case, the Plaintiffs released claims in the aggregate amount of $20,000, in consideration for the securities, said release not being in controversy.”
On May 18, 1973, the district court entered an order denying the summary judgment and said:
“Pursuant to 15 U.S.C. § 777 any person who uses the mails to offer or sell a security subject to the Act, without a registration statement being in effect as to the security is liable to “ * * the person purchasing such security from him * * * to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if he no longer owns the security.’
“The purpose of this section is clear. It was Congress’s intention that a party who purchased stock which was not registered and should have been registered under the Act is entitled to undo the transaction. The purchaser may sue in equity for recision and return of his consideration, or if he no longer owns the security he may sue for damages. Johns Hopkins University v. Hutton, 297 F.Supp. 1165 (D.Md.1968), rev’d on other grounds 422 F.2d 1126 [1124] (4th Cir. 1970).
“The plaintiffs have moved for summary judgment. According to the joint pre-trial statement the defendants admit that the offer to sell was in violation of 15 U.S.C. § 77e but they deny liability, presumably on the ground that the agreement which was entered into is wholly executory. * *
“There is apparently a serious question as to whether there has been any transaction in the instant case for the court to undo. Since at the present time there is a genuine issue of fact as to whether there has ever been a release of the claims in question, plaintiffs’ motion for summary judgment must be denied. The court, however, invites the defendants to move for summary judgment, prior to trial. If defendants can show by affidavit that the release has never been executed and that plaintiffs are pursuing the claims that they allegedly released, and that showing is not contradicted by opposing affidavit, summary judgment for defendant will be appropriate. If additional time is necessary to perfect the summary judgment motion, the court will entertain a motion to vacate the present trial date.”
On June 20, 1973, plaintiffs moved for a rehearing of their motion for summary judgment, and on July 27, 1973, defendants moved for summary judgment. On August 15, 1973, the district court entered an order denying plaintiffs a rehearing and granting defendants’ motion for summary judgment. On September 14, 1973, a judgment was entered dismissing the complaint.
This chronology is important to highlight the point that the contractual consideration of forbearance to sue relied upon in Chief Judge Chambers’ opinion was never asserted to the district court and, for that matter, was not even mentioned in the briefs on appeal to this Court. In the way the case was presented to the district court, the February 15, 1971 contract between the parties was entirely executory. The proofs showed conclusively that the stock of Basic Resources, Inc. had never been delivered to plaintiffs and that plaintiffs had never executed and delivered releases of their *1075claims against Financial Technology, Inc. Nevertheless, the settlement agreement did provide that plaintiffs would forbear suit or other action until April 30, 1971, and this consideration was performed and is obviously a good consideration, so the agreement was not entirely executory. This point was first noted of record in this case when Chief Judge Chambers prepared his opinion.
Throughout the proceedings, defendants have contended that a contract to sell an unregistered security in violation of the Securities Act of 1933 is unenforceable as an illegal bargain. This is not the law. Frost & Co. v. Coeur d’Alene Mines Corp., 312 U.S. 38, 61 S.Ct. 414, 85 L.Ed. 500 (1941); Judson v. Buckley, 130 F.2d 174 (2nd Cir. 1942); Occidental Life Ins. Co. v. Pat Ryan & Assoc., Inc., 496 F.2d 1255 (4th Cir. 1974); Wood v. Reznik, 248 F.2d 549 (7th Cir. 1957); Chapman v. Rudd Paint & Varnish Co., 409 F.2d 635, 640 (9th Cir. 1969).
If the foregoing recitation of the posture of the action in the trial court were all there is to the case, I would vote to affirm the summary judgment upon the long-established rule of appellate review that the appeals court will not reverse the trial court on a contention that was never presented to it. Walker v. Continental Life & Accident Company, 445 F.2d 1072 (9th Cir. 1971); Goldberg v. Weiner, 480 F.2d 1067 (9th Cir. 1973).
There is, however, another problem and that is that the judgment for defendants dismissed the 10b — 5 claim as well as the Section 5 Securities Act claim. With respect to the Section 5 claim, it may well be that the out-of-pocket rule is the correct measure of damages and, if the contract to sell unregistered securities had been wholly ex-ecutory, the judgment dismissing it was correct. But with respect to the 10b — 5 claim, there was an obvious disputed issue of material fact under the joint pretrial statement as to what, if any, misrepresentations had been made by the sellers. This precluded summary judgment on this claim. We can find no evidence in the record that plaintiffs ever waived or abandoned this part of the amended complaint. They simply chose to press the Section 5 claim by motion for partial summary judgment because they thought liability was clear and undisputed as a matter of law.
Chief Judge Chambers’ opinion shows that the measure of damages for a violation of 10b-5 may be substantially different from recovery for a violation of Section 5 of the Securities Act of 1933.
It is unnecessary to allege and prove a consummated or completed sale of securities as a condition to recovery under Section 10b of the Securities Exchange Act and SEC Rule 10b-5. Commerce Reporting Co. v. Puretec, Inc., 290 F.Supp. 715 (S.D.N.Y.1968); M. L. Lee & Co. v. American Cardboard & Packaging Corp., 36 F.R.D. 27 (E.D.Penn.1964); Cf. Radiation Dynamics, Inc. v. Goldmuntz, 464 F.2d 876, 890 (2nd Cir. 1972).
Inasmuch as it is my view that the summary judgment for defendants was improvidently granted on the 10b — 5 cause of action, there is little reason not to reverse the judgment as a whole. After all, the rule of appellate review not to reverse on a ground not presented below is not jurisdictional but is merely a rule of practice which may be relaxed when injustice might otherwise result. Krause v. Sacramento Inn, 479 F.2d 988 (9th Cir. 1973).