Dinco v. Dylex Limited

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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