UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 96-1519
GARY A. DINCO, ETC., ET AL.,
Plaintiffs, Appellees,
v.
DYLEX LIMITED, ET AL.,
Defendants, Appellants.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW HAMPSHIRE
[Hon. Shane Devine, Senior U.S. District Judge]
Before
Boudin, Circuit Judge,
Cyr, Senior Circuit Judge,
and Lynch, Circuit Judge.
Paul S. Samson with whom Mark T. Vaughan, Riemer & Braunstein,
Steven J. Kantor and Doremus Associates were on briefs for appellants.
Randall F. Cooper with whom Mary E. Maloney and Cooper, Deans &
Cargill, P.A. were on brief for appellees.
April 25, 1997
BOUDIN, Circuit Judge. Gary Dinco, Felix Weingart, Jr.,
and a holding company owned by Dinco and Weingart,
(collectively, "plaintiffs") brought this diversity action
against numerous defendants alleging various fraud and
securities-law claims in connection with the plaintiffs'
purchase of Manchester Manufacturing, Inc. ("MMI"). After a
lengthy trial, the jury found for the plaintiffs on their New
Hampshire "Blue Sky" and common law fraud claims against five
defendants who now appeal. We vacate the judgment and remand
for a new trial.
I.
We begin with a description of the background events,
identifying disputed issues as allegations. On sufficiency-
of-evidence claims, the plaintiffs are entitled to have us
assume that the jury saw matters their way. Ansin v. River
Oaks Furniture, Inc., 105 F.3d 745, 749 (1st Cir. 1997). For
other issues (e.g., whether an error was prejudicial), all of
the evidence may be pertinent. Davet v. Maccarone, 973 F.3d
22, 26 (1st Cir. 1992).
At the outset, this case involved four corporate
defendants: Sears, Roebuck & Co., a U.S. corporation; Dylex,
Ltd. ("Dylex"), a Canadian corporation; Dylex (Nederland)
B.V. ( Nederland ), a Netherlands corporation that is a
wholly owned subsidiary of Dylex; and 293483 Ontario Ltd.
("Ontario"), a Canadian holding company owned and managed by
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the individual defendants, Kenneth Axelrod, Mac Gunner, and
Harold Levy. Axelrod, Gunner and Levy also served as
management employees for a Canadian division of Dylex known
as Manchester Childrens Wear.
In 1974, Sears, Dylex, and Ontario formed MMI as a
Delaware corporation based in New Hampshire, primarily to
make children's clothing. MMI's common stock was issued to
Dylex (42%), Ontario (30%), and Sears (28%). Dylex
transferred its shares in MMI to its subsidiary, Nederland,
in 1978. By agreement among the shareholders, sale of the
stock was restricted and directorships were apportioned.
The six members of MMI's board of directors at all
pertinent times were Axelrod and Gunner (appointed by
Ontario), Wilfred Posluns and Irving Posluns (appointed by
Dylex), and Henry Schubert, Raymond Novotny, and Novotny's
successor, Melville Hill (all appointed by Sears). Donald
Williams, Dylex's chief financial officer and a director of
Dylex and managing director of Nederland, attended most of
MMI's board meetings. Axelrod and Gunner were elected
annually as MMI's president and treasurer.
At first, MMI successfully made clothing, primarily for
Sears. During this early period, plaintiffs Dinco (hired in
1976) and Weingart (hired in 1977) served respectively as
MMI's plant manager and comptroller. However, competition
from Asian manufacturers increased; around 1980, Sears began
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to purchase apparel from overseas manufacturers and withdrew
business from MMI.
The loss of Sears' business threatened MMI's existence.
Dylex favored liquidation, but Sears did not want to lose its
investment in the company and suggested that MMI's New
Hampshire facility be used to store and distribute inventory
imported by Sears. MMI thus changed direction and in 1982,
Sears and MMI entered a distribution contract. At this time
Dinco and Weingart continued to run MMI's daily operations.
MMI's distribution business with Sears grew steadily
through 1986, when it represented about 70 percent of MMI's
gross income. In August 1986, Sears completed an internal
review of its warehousing and distribution business; the
report, made known publicly in March 1987, recommended
downsizing these operations to reduce inventory costs. Sears
began selling its ownership interests and, by December 1988,
MMI was the only remaining provider in which Sears held an
ownership interest.
Around September 1987, the three Sears buying
departments that used MMI s facility suggested that Sears
store its inventory instead with a California firm. Sears'
distribution department reported this plan to Novotny and
Hill, who allegedly informed MMI's board of directors. In
September or October 1987, the board decided to sell MMI. In
October 1987, an acquaintance of Levy sought to purchase MMI
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but withdrew when Gunner told him that Sears would not
provide a requested guarantee of minimum sales volume for
three years.
In January 1988, Gunner, Axelrod and Levy informed Dinco
and Weingart that MMI was being offered for sale; Dinco and
Weingart were allegedly told that the reason for the sale was
that Sears had decided to divest itself of ownership in
affiliated factories, but that Sears' business with MMI would
continue as usual.1 In February 1988, Dinco and Weingart met
with Gunner, Levy, Hill, and brokers hired by the MMI board
of directors to sell MMI. Hill stated that Sears would not
make any written guarantees of business, but said that, in
his experience, "99.9% of the time when the ties are cut" in
divestiture sales, business with Sears remained the same or
increased.
Dinco and Weingart, concerned that MMI's sale might
eliminate their jobs, formed a holding company to purchase
MMI. At a meeting with Hill, Gunner, Levy and the brokers on
May 14, 1988, Dinco and Weingart expressed interest in
purchasing MMI; and Hill again said that based on his
experience, MMI's business with Sears would be as good or
1Weingart testified that Levy had made these statements
but that they were "confirmed" by Gunner and Axelrod, who
were participating by conference call. Admittedly, the
testimony is not perfectly clear and, at the time, Dinco and
Weingart were being addressed as employees, not as
prospective buyers.
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better after the sale. On May 19, Axelrod, Levy and Gunner
allegedly said that they would support the efforts of Dinco
and Weingart to buy MMI and confirmed that "Sears would be
there in the future" and business "would be as usual."
On June 3, 1988, Dinco and Weingart offered to purchase
all of MMI's business assets and a portion of MMI's real
estate for a total of $2,050,000. The offer was contingent
upon a guarantee by Sears of $1.1 million in gross sales to
MMI for one year after the sale. The offer was rejected, and
Dinco and Weingart were told that MMI wanted to sell all of
its real estate and that Sears would not provide any written
guarantees of minimum business volume. A second and a third
offer by Dinco and Weingart, each linked to a minimum volume
of Sears business, were rejected over the next several
months.
In September 1988, Dinco and Weingart made a fourth
offer to buy MMI, not contingent on any minimum volume
guarantees. They obtained financing from several sources,
some of it secured in reliance upon Hill's statement that he
believed business with Sears would remain unchanged or
improve. Finally, in late December 1988, the parties agreed
that Dinco and Weingart would purchase MMI's real estate and
outstanding stock for a total of $2,045,000. The deal closed
that same month.
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Following the sale of MMI to Dinco and Weingart, Sears'
business with MMI continued to decline. A year later, on
December 24, 1989, Dinco and Weingart were informed that
their distribution contract with Sears was terminated. Dinco
and Weingart were unable to meet their debt service, and one
of the mortgagees, the First New Hampshire Bank, foreclosed
on MMI's real estate in November 1990.
In December 1991, Dinco, Weingart and their holding
company filed suit against Sears, Dylex, Nederland, Ontario,
Axelrod, Gunner and Levy.2 In addition to federal
securities-law claims, the plaintiffs alleged violation of
the New Hampshire Uniform Securities Act (also known as the
"Blue Sky" law), N.H. Rev. Stat. Ann. 421-B:3, and common
law claims for fraud. Prior to trial, all of the federal
claims were dismissed or withdrawn. Manchester Mfg.
Acquisitions, Inc. v. Sears, Roebuck & Co., 802 F. Supp. 595
(D.N.H. 1992); 909 F. Supp. 47 (D.N.H. 1995). On the eve of
trial, Sears settled with the plaintiffs for $750,000.
A 14-day jury trial began in October 1995. In November,
the jury returned verdicts in favor of the plaintiffs against
Dylex, Nederland, Ontario, Axelrod and Gunner, but not
against Levy. Against the remaining five defendants, the
jury awarded $2,385,000 on the statutory Blue Sky claim and
2Axelrod's estate was the named defendant because
Axelrod died prior to trial. For simplicity, we will refer
to the defendant simply as "Axelrod."
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$523,500 on the common law fraud claim. The court awarded
attorneys' fees, costs, and prejudgment interest to the
plaintiffs. The five defendants held liable now appeal on
various grounds.
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II.
We begin with the legal elements of the claims at issue
and with attacks on the district court's jury instructions,
for it is hard to discuss sufficiency of the evidence without
legal benchmarks. And while there is not much doubt about
most of the elements of common law fraud and New Hampshire's
Blue Sky law--we describe both briefly--the vicarious
liability rules attending such claims are very much in
dispute.
Pertinently, under New Hampshire law, common law fraud
requires that the defendant fraudulently misrepresent a
material fact and that the plaintiff justifiably rely upon
the misrepresentation. Gray v. First NH Banks, 640 A.2d 276,
279 (N.H. 1994). A Blue Sky claim is made out where, inter
alia, the defendant, "in connection with the offer, sale, or
purchase of any security, directly or indirectly" makes an
untrue statement of material fact or omits to state a
material fact "necessary . . . to make the statements made .
. . not misleading." N.H. Rev. Stat. Ann. 421-B:3.3
The next link in the chain is vicarious liability. In
this case Sears had settled for itself and its employee Hill,
who had made the most blatantly misleading statements. Thus,
3New Hampshire's statute is a version (largely
unmodified) of the Uniform Securities Act, also adopted in
some form by thirty-seven other states. 1 Blue Sky L. Rep.
(CCH) 5500, at 1503 (1995). Pertinent provisions of the
statute are reprinted in an appendix to this opinion.
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to reach the remaining corporate and individual defendants,
the plaintiffs relied heavily, although not exclusively, upon
common-law theories that make one person liable for the acts
of another: agency, partnership, and civil conspiracy.
The district court obliged, instructing the jury as to
each of these three theories and providing definitions. The
three theories were actually four, because under the heading
of agency the district court instructed separately as to
apparent authority and as to liability for acts done within
the scope of employment. The plaintiffs' counsel began his
closing argument by laying stress on such theories and
returned to them throughout in discussing the evidence.
The defendants' first argument on appeal is that
"vicarious liability" is not a permissible theory under the
New Hampshire Blue Sky statute in light of Central Bank of
Denver, N.A. v. First Interstate Bank of Denver, N.A., 114 S.
Ct. 1439 (1994). The phrase "vicarious liability" is
something of a trap where used promiscuously to embrace
markedly different theories of third-party liability, such as
agency, partnership and civil conspiracy. Central Bank
involved none of these concepts, but rather rejected "aiding
and abetting" liability under section 10(b) of the Securities
and Exchange Act of 1934, 15 U.S.C. 78j.
Although New Hampshire's Blue Sky law is to be construed
in conjunction with "the related federal regulation," N.H.
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Rev. Stat. Ann. 421-B:32, the notion that all vicarious
liability is barred under the state statute is fanciful. The
statute in detail specifies that third-party liability may be
based upon "control," "aiding," partnership, and other
particular grounds. Id. 421-B:25(III). At the same time,
reasonable lack of knowledge is an affirmative defense
against these forms of vicarious liability. Id. 421-
B:25(IV). Curiously, the district court made no reference to
these statutory concepts in its instructions.
Thus, the defendants' general proposition is wrong:
vicarious liability--of several types--is provided for by the
statute itself. What is more, the defendants' broad
assertion was not preserved by objection after the judge
instructed the jury, as Fed. R. Civ. P. 51 requires, and is
therefore lost absent plain error. The defendants say that
they raised the objection earlier in motion papers, but that
is not enough, see Transamerica Premier Ins. Co. v. Ober, 107
F.3d 925, 933 (1st Cir. 1997), and the transcript refutes
their claim that they renewed their broad objection after the
jury was instructed.
If we could rescue this verdict by resort to Rule 51, we
would readily do so: it is counsel's obligation to comply
strictly with Rule 51, especially so in a long and complex
civil proceeding. Yet, for other reasons this case must go
back for a new trial, and it is unfair to leave the district
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court in the dark on the true issue--namely, whether under
the Blue Sky statute, one or more of the traditional common
law theories of third-party liability can be used to
supplement the statutory vicarious liability provision.
Unfortunately, this is an exceedingly difficult question to
which no certain answer can be returned.
In construing the Securities Exchange Act, this court
concluded that the statutory section imposing vicarious
liability (section 20, 15 U.S.C. 78t(a)) did not foreclose
alternative common-law avenues. In re Atlantic Financial
Management, Inc., 784 F.2d 29, 35 (1st Cir. 1986), cert.
denied, 481 U.S. 1072 (1987). But in Central Bank, the
Supreme Court more recently said that Congress' choice in
section 20 "to impose some forms of secondary liability, but
not others, indicates a deliberate congressional choice with
which the courts should not interfere," 114 S. Ct. at 1452,
casting some doubt on Atlantic Financial. See id. at 1460
n.12 (Stevens, J., dissenting). But see Seolas v. Bilzerian,
951 F. Supp. 978, 984 (D. Utah 1997).
In any event, federal case law is only suggestive as to
how the state statute should be construed, and the New
Hampshire statute differs from federal securities law by,
among other differences, providing that it "does not create
any cause of action not specified in this section." N.H.
Rev. Stat. Ann. 421-B:25(XI). This language, together with
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Central Bank's general reasoning, suggests that the New
Hampshire statute has developed a self-contained regime for
third-party liability, displacing common law theories. Other
courts, construing state versions of the Uniform Securities
Act akin to New Hampshire's statute, appear to have taken
this view. Connecticut Nat'l Bank v. Giacomi, 659 A.2d 1166,
1176-77 (Conn. 1995); Atlanta Skin & Cancer Clinic, P.C. v.
Hallmark Gen. Partners, Inc., 463 S.E.2d 600, 604-05 (S.C.
1995).
The district court on retrial is free to reach a
different conclusion. Obviously it should do so if in the
meantime the New Hampshire Supreme Court so instructs in
another case; and it may do so if it is persuaded differently
by the parties on remand, since the parties here have
scarcely addressed the pertinent statutory provisions. But
defendants' past failure to comply with Rule 51 does not
justify perpetuating possible error where a new trial is
necessary in any event.
This brings us to a set of objections that the
defendants clearly did renew after the jury instructions had
been given: that the evidence did not support instructions
on either a partnership or civil conspiracy theory. The
defendants do not dispute that such bases of liability are
legally available for common law fraud, and (as noted) they
have forfeited the objection on this go-around as to the Blue
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Sky claim. But the issue here is different: the defendants
objected that the instructions were improper in this case for
lack of evidence as to partnership and conspiracy.
Normally, it is error--although not necessarily
prejudicial error--to instruct on an independent theory of
liability where the evidence is inadequate to permit a
reasonable jury to find the facts necessary to make out the
theory. E.g., Sexton v. Gulf Oil Corp., 809 F.2d 167, 169
(1st Cir. 1987). Here, over explicit objection, the district
court gave substantial and independent instructions as to
partnership and civil conspiracy, placing these separate
bases of vicarious liability squarely before the jury.
It is a closer question whether this issue, timely
raised in the district court, has been adequately preserved
on appeal, for the defendants challenge the evidence but do
not focus upon the instructions. We think that, just barely,
the propriety of the instructions is impugned by the
defendants' detailed argument that the evidence failed to
support vicarious liability. This attack in turn has
provoked a response from plaintiffs that allows us to see
what record evidence they think supports such liability.
We conclude that the partnership instruction cannot be
justified in this case and that its inclusion may well have
misled the jury. What the district court said on this issue
is as follows:
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The plaintiffs here also contend
that the nature of the relationship among
the various defendants was that of a
partnership, and in that respect you are
instructed that when two or more persons
join in a business enterprise or some
activity with a common purpose and each
has a right to control or manage, then
each is liable for any legal fault of the
others committed within the scope of the
enterprise.
Every partner is an agent of the
partnership for the purposes of the
business, and the act of every partner
including the execution and the
partnership name of any instrument or
apparently carrying on in the usual way
the business of the partnership of which
he or she is a member binds the
partnership unless the partner so acting
has in fact no authority to act for the
partnership in the particular manner and
the person with whom he is dealing has
knowledge of the fact that he has no
authority.
The difficulty is that there was no evidence of a
partnership among the defendants. There are corporations and
their officers, employees and agents--but nowhere is there a
partnership visible on the defense side. We are talking
here, it should be remembered, not about a colloquial usage
of the term "partner" but about a legal relationship that
broadly imposes liability without fault upon otherwise
innocent parties. H. Reuschlein & W. Gregory, The Law of
Agency and Partnership 203, at 306-10 (2d ed. 1990).
The individual defendants did not even arguably fit in
this discrete business category. Perhaps the nearest
possibility is to call the venture among the corporate owners
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of MMI a partnership; but shareholders of a closely held
company are not ipso facto partners, nor can they normally be
treated as partners simply because they join to sell their
shares to a single purchaser. Otherwise, we would undo the
ordinary protections of corporate form in many close
corporations. Cf. Terren v. Butler, 597 A.2d 69, 72-73 (N.H.
1991).
The partner-liability instruction given here effectively
invited the jury to find a partnership somewhere in this case
based on a brief but broad definition ("business enterprise
or some activity with a common purpose" plus joint control).
A jury, uncertain about the proof on conspiracy or agency,
could easily have thought that the mere association of the
defendants in seeking to sell MMI made each liable for
whatever the others did in connection with the sale. That is
not the law.
Frequently, in civil jury cases with multiple theories,
judges use special verdicts or interrogatories to isolate
potential problems. See Fed. R. Civ. P. 49. Here, for
example, the district court could have asked the jury to say,
as to each defendant and each of the two claims, whether it
based liability on direct participation, agency, partnership
or conspiracy. But the court asked only for separate
verdicts against each defendant on the common law and
statutory claims. Thus, on each count, liability could
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easily have been based on partnership--the vicarious
liability theory, at least as defined, with the fewest
strings attached.
Assessing the risk of prejudice from an uncalled-for
instruction is no easy matter. If the evidence were
overwhelming on alternative theories, we might well treat as
harmless an error whose inherent tendency is to cure itself.
Jerlyn Yacht Sales, Inc. v. Wayne R. Roman Yacht Brokerage,
950 F.2d 60, 69 (1st Cir. 1991). But the breadth of the
partnership instruction dampened this tendency; and, as will
become clear, vicarious liability on other theories is at
best a close call.
We are also doubtful whether there was an adequate
evidentiary basis for instructing on civil conspiracy,
although this is a closer question. To oversimplify
slightly, the civil conspiracy charge required proof that two
or more of the individuals on the defense side had agreed to
the use of lies or culpable omissions about MMI's post-sale
prospects. Aetna Cas. Sur. Co. v. P&B Autobody, 43 F.3d
1546, 1564 (1st Cir. 1994); Ferguson v. Omnimedia, Inc., 469
F.2d 194, 197 (1st Cir. 1972).4 The companies, of course,
4Civil conspiracy can be used to impose vicarious
liability in a fraud case. E.g., Aetna, 43 F.3d at 1564-65.
As already noted, it is not clear that it is available under
the Blue Sky statute, although the "aiding" provision of that
statute may create an overlapping basis for liability.
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could also be conspirators, but only if individuals acting
for the companies made such agreements.
No direct proof of such an agreement was offered, but in
conspiracy cases proof by inference is common, and such proof
may suggest either that there was a formal (but concealed)
agreement or that there was a working understanding that
amounted to an implicit agreement. See United States v.
Moran, 984 F.2d 1299, 1303 (1st Cir. 1993). In certain
situations, circumstantial proof to this end may be
compelling: if a gang of drug dealers were caught in the
middle of a sale, it would be a very small step to infer a
prior agreement.
Here, however, the central activity--the sale of MMI--
was entirely lawful and of necessity involved some
consultation among the owners. The limited
misrepresentations alleged to have occurred were sporadic,
oral comments of a few individuals (Hill, Gunner, Axelrod,
and Levy). Each one had independent reasons to make the sale
succeed and, assuming the plaintiffs' version of events, each
made varying statements that a jury could find to be
culpable. To infer an agreement to lie or conceal is another
matter entirely.
We need not resolve the issue since a retrial is needed
on account of the partnership instruction. The conspiracy
issue has not been thoroughly briefed, the evidence on
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retrial may vary, and courts have sometimes been generous in
allowing the jury to infer agreement even where criminal
conspiracy is not involved. If the trial court does allow
the conspiracy charge to reach the jury, it might wish to ask
a separate question on this issue, and perhaps on other
theories of primary and vicarious liability as well. See 9A
C. Wright & A. Miller, Federal Practice and Procedure: Civil
2d 2505, at 166-67 (1995).
III.
Apart from their new trial claims, the defendants argue
that they are entitled to outright dismissal because the
plaintiffs failed to produce sufficient evidence to sustain
any valid theory of liability. This claim was properly
preserved in the district court and we review de novo the
denial of motions for judgment as a matter of law. Ansin,
105 F.3d at 753. We reverse a denial only if "reasonable
persons could not have reached the conclusion that the jury
embraced." Sanchez v. Puerto Rico Oil Co., 37 F.3d 712, 716
(1st Cir. 1994).
On this record, the jury could have concluded--although
just barely--that Gunner and Axelrod were liable for their
own misrepresentations. As already noted, Weingart testified
that, during a conference call in January 1988, Gunner and
Axelrod "confirmed" that the sale of MMI "had nothing to do
with the Sears contract business" and that MMI's business
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with Sears would continue as usual. And, at a meeting on May
19, 1988, Gunner and Axelrod said that "as far as they knew
Sears would be there in the future."
It was Hill who made the more specific misstatements
already described, saying several times in the presence of
Gunner and perhaps Axelrod that MMI's business with Sears
would almost certainly continue unchanged or increase.
Absent conspiracy, the latter two are perhaps not directly
accountable for the former's misstatements. But it may be
that the milder statements of Axelrod and Gunner were made
even more misleading in the context of Hill's statements.
Axelrod did warn the plaintiffs against buying MMI, but the
jury could have regarded a generic warning as insufficient to
overcome misrepresentations.
Since Sears provided a large proportion of MMI's
business, these statements were plainly material. And there
was evidence, albeit disputable, that could have persuaded
the jury that Gunner and Axelrod knew that these statements
were false or misleading at the time they were made, thus
satisfying the scienter element for common law fraud. As for
the Blue Sky law, it appears likely that mere negligence is
enough. See Sprangers v. Interactive Tech., Inc., 394 N.W.2d
498, 503 (Minn. Ct. App. 1986).
The evidence of knowledge was indirect, resting on two
linked premises: that the Sears members of MMI's board knew
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about the probable withdrawal of Sears' business and that
they conveyed this information to the full board, including
Gunner and Axelrod. Susann Mayo, a Sears distribution
manager, gave deposition testimony on both points; and
Novotny testified that in February 1987, he was told by
another Sears employee that "nobody in his right mind would
buy [MMI] without some sort of guarantee that Sears business
will continue," and also testified about his general practice
of providing information to MMI's board of directors.
The common law claim required "clear and convincing
proof" of fraud, reflecting at least a "conscious
indifference to [the] truth." Brochu v. Ortho Pharm. Corp.,
642 F.2d 652, 662 (1st Cir. 1981). But if Mayo's testimony
were credited and indirectly confirmed by Novotny, the jury
could find clear and convincing proof that Gunner and Axelrod
knew that Sears business with MMI was likely to decline and
that the sale of MMI was prompted by this concern. The case
is not overwhelming, but was sufficient to get to the jury
based on actual knowledge. We reject, however, plaintiffs'
attempt to impute all of Sears' knowledge to the other
defendants on a partnership theory.
The final fact at issue is reasonable reliance by the
buyers, a familiar element for the common law claim, Gray,
640 A.2d at 279, and perhaps, but less clearly so, for the
Blue Sky claim. Compare Gohler, IRA v. Wood, 919 P.2d 561,
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566 (Utah 1996) (reliance not required under the Uniform
Securities Act). There is no rigid rule on what makes
reliance reasonable; courts, including this one, have
resorted to checklists of factors. Kennedy v. Josephthal &
Co., 814 F.2d 798, 804 (1st Cir. 1987).
Here, it is a close question whether reliance was
reasonable. Dinco and Weingart knew a good deal about MMI's
business and also that one of the Sears departments was
discontinuing business with MMI. Their repeated efforts to
secure a guarantee of continued Sears business show that they
were well aware of the danger. There was testimony, which
the jury may not have credited, that Novotny warned them that
MMI could not rely upon continued business with Sears, and
Axelrod also gave a more general warning.
At the same time, the jury could have found that Axelrod
and Gunner knew that continued Sears business was not only
uncertain but unlikely. And, taking the disputed facts
favorably to the verdict, both defendants had specific
information as to why it was unlikely--information that was
not available to the buyers, whatever their general knowledge
about MMI's business. The jury was thus permitted, although
certainly not required, to find reasonable reliance.
This brings us to the responsibility of the corporate
defendants, perhaps the most difficult issue in the case.
Partly this is so because the law on this issue is complex
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(and differs as between the common law fraud and the Blue Sky
claims) and partly because of the entangled relationships
between the individuals and the companies. Let us start with
a few basics, beginning with ordinary rules of agency that
unquestionably apply to the common law fraud claim.
A principal is liable for actually authorized wrongs,
but there was no proof that any of the charged misstatements
was directly authorized by anyone. Indeed, in his charge the
district court instead emphasized apparent authority and
respondeat superior liability; as to the latter, he said that
a company is liable for acts of an employee or agent "acting
within the scope of his employment." The defendants do not
dispute that the agency rules were correctly stated. See
Atlantic Financial, 784 F.2d at 31-32.
Given these rules, we think that the evidence permitted
the jury to impose liability both on Ontario and upon Dylex
and its Nederland subsidiary.5 Gunner and Axelrod both
worked for Dylex and were themselves the owners (with Levy)
and chief officers of Ontario. Even if Hill were taken as
primarily representing Sears, Axelrod and Gunner (together
5As noted earlier, Dylex owned Nederland, Nederland
owned Dylex's MMI stock, and Gunner and Axelrod worked for an
unincorporated division of Dylex. Perhaps because of this
intertwining, the defendants' brief has made no effort to
distinguish the respective roles of Dylex and Nederland, and
we pass over this possibility.
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with Levy) were the only direct links between the buyers and
the corporate defendants other than Sears.
Indeed, both Axelrod and Gunner received compensation
only from Dylex, even though they also served as officers and
directors of MMI; and their May 19, 1988 meeting with the
plaintiffs about the prospective sale, during which Axelrod
and Gunner made misleading statements, took place at Dylex's
offices in Montreal. In the context of the sale, Axelrod and
Gunner could be treated without difficulty as agents or
apparent agents both of Dylex and Ontario for purposes of
making the sale. Cf. Restatement (Second) of Agency
14L(1), 226 (1958).
Turning to the Blue Sky claim, that statute imposes
vicarious liability on every person who "directly or
indirectly controls a person" who has direct liability. N.H.
Rev. Stat. Ann. 421-B:25(III). And, as noted, Gunner and
Axelrod were employees of Dylex and owners and officers of
Ontario. This is enough to make a prima facie case that the
corporate defendants were "controlling persons." See SEC v.
First Sec. Co. of Chicago, 463 F.2d 981, 987-88 (7th Cir.),
cert. denied, 409 U.S. 880 (1972).
A controlling person may defeat liability if it proves
that it did not know, and despite reasonable care could not
have known, the true facts. Id. 421-B:25(IV). But Ontario
could hardly make such a showing since Gunner and Axelrod
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were its chief officers; and, as Axelrod was a director of
Dylex, his knowledge about Sears' prospects could be imputed
to Dylex. See Sutton Mut. Ins. Co. v. Notre Dame Arena,
Inc., 237 A.2d 676, 679 (N.H. 1968). Nederland alone might
dispute controlling person liability, but has not sought to
distinguish itself from Dylex. Thus, the defendants are not
entitled to judgment as a matter of law on the common law or
Blue Sky claims.
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IV.
The defendants have made numerous claims of trial error
under five additional heads. The claims relate, primarily,
to plaintiffs' expert testimony on corporate practice, to the
admission or exclusion of specific documents and statements,
and to damages. Most of the issues do not involve abstract
legal rulings but judgments about the permissible uses of
certain evidence, the soundness of premises used by the
experts, and how damage issues in this case should be
structured for the jury.
Many of the issues may not arise in the same form on
retrial or the trial judge may treat them differently. We
are unwilling to go very far in tying the hands of the trial
judge on matters where on-the-spot judgments are crucial,
discretion is substantial, and more than one alternative is
often permitted. But this is a case that patently should be
settled, as we told the parties at oral argument, and it may
assist the parties for us to make three general comments
about certain of the defendants' claims of error.
First, the defendants sought to exclude as hearsay-
within-hearsay Sears documents that cast a pessimistic light
on Sears' internal plans for MMI's future. The district
court disagreed and admitted the documents alternatively as
admissions by an agent or servant, Fed. R. Evid.
801(d)(2)(D), or as admissions by a co-conspirator, id.
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801(d)(2)(E). Proof of conspiracy was meager, and we have
even more difficulty seeing how in preparing these documents
the Sears authors (such as Mayo and Novotny) served as agents
or employees of any of the remaining non-Sears defendants.
Nonetheless, the defendants ought to appreciate that
many of the Sears documents might be admissible to show the
state of knowledge of Sears' representatives on the MMI
board. To the extent that other evidence indicates that
Sears' plans were conveyed to MMI's other directors, this
could affect the knowledge of other defendants. We do not
purport to rule on particular documents but think that the
defendants should be aware of this logic in assessing their
position.
Second, the defendants complain that Mark McKinsey, a
plaintiffs' expert who testified on corporate practice,
should not have been allowed to testify and, in any event,
went too far in telling the jury how to decide contested
issues. As to the expert's qualifications, close cases are
largely for the district court. Espeaignnette v. Gene
Tierney Co., 43 F.3d 1, 11 (1st Cir. 1994). Given what we
currently know of defendants' objections, we would be
unlikely to reverse the district court if it deemed this
expert qualified and left weight to the jury.
But we have little doubt that a tighter rein should be
kept on this expert if another trial proves necessary. It is
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one thing to testify about ordinary corporate practice; it is
quite another for the expert to tell the jury at length that
the plaintiffs reasonably relied upon specific statements
made to them. Yes, the bar on "ultimate issue" opinions has
been abolished in civil cases, Fed. R. Evid. 704(a); but that
is not a carte blanche for experts to substitute their views
for matters well within the ken of the jury. See United
States v. Duncan, 42 F.3d 97, 101 (2d Cir. 1994).
Third, the jury awarded plaintiffs $2,908,500, almost $1
million more than the price that they paid for MMI; and their
expert--who sponsored an even larger figure--explicitly based
his calculations of lost profits by projecting 20 years of
continued Sears business for MMI. Even under a "benefit of
the bargain" theory, Wilson v. Came, 366 A.2d 474, 475 (N.H.
1976), it seems to us that no purchaser could reasonably take
the assurances provided by any defendant as a guarantee that
Sears business would continue unabated for 20 years.
There is no need for us to address another concern about
this damage award--importantly, the risk that double recovery
may have occurred; this is a matter that can be guarded
against on retrial through the use of instructions and
verdict forms, now that the problem is fully in focus.
Whether any award based on future profits is too speculative,
cf. Hydraform Prod. Corp. v. American Steel & Aluminum Corp.,
498 A.2d 339, 345 (N.H. 1985), is an issue we do not decide.
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To conclude, the plaintiffs have a potential, but hardly
certain, case against the defendants. The defendants have to
consider the Sears documents and jury sympathy; the
plaintiffs, the risk of recovering nothing and some limits on
just how ambitious a recovery could be sustained. Now that
the appeal is resolved and both sides face the expense of a
retrial, counsel owe it to their clients to renew
discussions.
The judgment is vacated and the case is remanded for a
new trial consistent with this decision.
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APPENDIX
APPENDIX
This appendix contains pertinent provisions of the
Uniform Securities Act, N.H. Rev. Stat. Ann. 421-B:1 et
seq.
421-B:3. Sales and Purchases
421-B:3. Sales and Purchases
It is unlawful for any person, in connection with the
offer, sale, or purchase of any security, directly or
indirectly:
I. To employ any device, scheme, or artifice to defraud;
II. 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 are made, not misleading; or
III. To engage in any act, practice, or course of
business which operates or would operate as a fraud or deceit
upon any person.
421-B:2. Definitions
421-B:2. Definitions
* * * * *
XVI. "Person" means an individual, corporation,
partnership, association, joint stock company, trust where
the interests of the beneficiaries are evidenced by a
security, unincorporated organization, a government,
political subdivision of a government, or any other entity.
* * * * *
421-B:25. Civil Liabilities
421-B:25. Civil Liabilities
* * * * *
II. Any person who violates RSA 421-B:3 in connection
with the purchase or sale of any security shall be liable to
any person damaged by the violation of that section who sold
such security to him or to whom he sold such security . . . .
Damages in an action pursuant to this paragraph shall include
the actual damages sustained plus interest from the date of
payment or sale, costs, and reasonable attorney's fees.
III. Every person who directly or indirectly controls a
person liable under paragraph I or II, every partner,
principal executive officer, or director of such person,
every person occupying a similar status or performing a
similar function, every employee of such person who
materially aids in the act or transaction constituting the
violation, and every broker-dealer or agent who materially
aids in the acts or transactions constituting the violation,
are also liable jointly and severally with and to the same
extent as such person. There is contribution as in cases of
contract among the several persons so liable.
IV. No person shall be liable under paragraphs I and III
who shall sustain the burden of proof that he did not know,
and in the exercise of reasonable care could not have known,
of the existence of facts by reason of which the liability is
alleged to exist.
* * * * *
XI. The rights and remedies promulgated by this chapter
are in addition to any other right or remedy that may exist
at law or in equity, but this chapter does not create any
cause of action not specified in this section or RSA 421-B:8,
V. . . .
421-B:32. Statutory Policy
421-B:32. Statutory Policy
This chapter shall be so construed as to effectuate its
general purpose to make uniform the law of those states which
enact it and to coordinate the interpretation of this chapter
with the related federal regulation.
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