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Cobb v. Uplands Hardware Corp.

MARCH 17, 1966.

KENNETH COBB, ET AL., PLAINTIFFS-APPELLANTS,

v.

UPLANDS HARDWARE CORP., NELSON KUNTZ, AND JEFFERSON TRUST & SAVINGS BANK OF PEORIA, DEFENDANTS-APPELLEES.



Appeal from the Circuit Court of the Tenth Judicial Circuit, Peoria County; the Hon. ROBERT E. HUNT, Judge, presiding. Judgment affirmed.

MR. JUSTICE MORAN DELIVERED THE OPINION OF THE COURT.

The sole question presented by this appeal is whether the defendant-appellee bank is, under the particular facts of this case, an underwriter as defined by the Illinois Securities Law of 1953.

Plaintiffs-appellants filed suit against Uplands Hardware Corp., Nelson Kuntz, president of the corporation, and Jefferson Trust and Savings Bank of Peoria to recover the purchase price of certain corporate securities allegedly sold to them in violation of the Illinois Securities Law. A bench trial was had resulting in a judgment against the corporation and Kuntz; however, the court found in favor of the defendant bank against plaintiffs. Plaintiffs have appealed from that portion of the judgment in favor of the bank.

From the evidence it is disclosed that in 1959 the male plaintiffs were part-time employees of the defendant corporation. Early that year defendant Kuntz, the corporation president, offered to sell each of them, and to other employees, twenty of his shares of the common stock of the corporation for Five Thousand ($5,000) Dollars each or Two Hundred Fifty ($250) Dollars per share. At this time the stock had a book value of Eighty ($80) Dollars per share. Kuntz advised them that he had arranged financing for them and that a portion of their wages would be deducted to pay for the cost of the shares. After accepting the proposal, the plaintiffs were presented with personal financial statement forms. The forms were filled in and returned to Kuntz who gave each of them a promissory note payable to defendant bank in the amount of Five Thousand Five Hundred ($5,500) Dollars. The plaintiffs were told to sign the notes and have their wives sign them.

After the notes were signed and returned each of the plaintiffs was presented with a cashier's check in the amount of Five Thousand ($5,000) Dollars, payable to his order, a stock certificate for twenty shares in the corporation and a stock repurchase agreement. Each plaintiff endorsed his check and stock certificate in blank and executed the repurchase agreement. The checks were deposited in the corporation account and the stock certificates were delivered to defendant bank as collateral security for the loans. In addition the notes were guaranteed by the corporation and Kuntz and credit life insurance on each borrower was obtained by the bank.

Thereafter, wage deductions were made until plaintiffs left their employment with the corporation in 1961. Then plaintiffs made monthly payments on the notes directly to the bank and executed renewal notes.

In 1962, after the corporation suffered financial reverses, plaintiffs notified defendants of their intention to declare the sale of the securities void in accordance with the Illinois Securities Law and they filed this action for the return of the purchase price of the shares and for interest and attorney's fees.

It would appear that at the time of the transaction the corporation was indebted to the bank in the amount of Ten Thousand ($10,000) Dollars against an established line of credit of Fifteen Thousand ($15,000) Dollars. It would also appear that an officer of the bank was fully informed about the transaction and the proposed use of the funds to be borrowed by plaintiffs.

The original transaction was voidable under the Illinois Securities Law of 1953 for the reasons that the securities were not "exempt securities" under section 3 of the Act, ch 121 1/2, § 137.3, Ill Rev Stats; the sale was not reported to the Secretary of State as required by paragraph G of section 4 of the Act, ch 121 1/2, § 137.4, Ill Rev Stats; and the shares were not registered by the Secretary of State under ch 121 1/2, section 5, Ill Rev Stats. However, had the corporation or Kuntz reported the sale to the Secretary of State within thirty days after the sale and paid the two dollar filing fee in accordance with paragraph G of section 4, the transaction would have been valid and plaintiffs would have had no cause to complain.

Plaintiffs charged that defendant bank was liable as an underwriter as defined by section 2 of the Securities Act. The trial court held in favor of plaintiffs against the corporation and Kuntz, but found the bank not to be an underwriter. This appeal tests the trial court's finding in favor of the bank.

The statutory definition of "underwriter" as it was worded at the time of the transaction in 1959 was:

"The word `underwriter' shall mean any person who has purchased a security from an issuer or a controlling person with a view to, or sells a security for an issuer or a controlling person in connection with, the distribution thereof, or participates or has a participation in the direct or indirect underwriting of such distribution; but such term shall not include a person whose interest is limited to a commission or discount from an underwriter or dealer not in excess of the usual and customary distributors' or sellers' commission or discount. An underwriter shall be deemed to be no longer an underwriter of a security after he has completely disposed of his allotment of such security or, if he did not purchase the security after he had ceased to sell such security for the issuer or controlling person."

Chapter 121 1/2, § 137.2F, Ill Rev Stats (1957).

A similar provision amended in form only may now be found in Chapter 121 1/2, § ...


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