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Gowdy v. Richter

JUNE 20, 1974.




APPEAL from the Circuit Court of Cook County; the Hon. RICHARD A. HAREWOOD, Judge, presiding.


Howard F. Gowdy filed an action under the Illinois "Blue Sky" Law (Ill. Rev. Stat. 1967, ch. 121 1/2, par. 137.1 et seq.) in the circuit court of Cook County seeking to rescind his $20,000 purchase of 200 shares of allegedly unregistered stock in Continental-Harrison Company, a Delaware corporation. Joined as defendants in the suit were Walter H. Richter, chairman of Continental's board of directors; A.C. McClurg and Company, an Illinois corporation; Philip Weisman, McClurg's president; and Robert H. Greenberg, a member of Continental's board of directors. The defendants rejected Gowdy's tender of the stock prior to trial and disclaimed liability under the statute. Gowdy died during the pendency of this action, and his widow, Suzanne G. Gowdy, was substituted as plaintiff in her capacity as special alministrator of Gowdy's estate. At the conclusion of the trial, the court also granted her motion to be named as an individual plaintiff. After a bench trial, the court entered judgment for plaintiff imposing joint and several liability against all defendants for $28,500. The facts follow.

On July 29, 1965, a letter agreement was consummated between Weisman as president of McClurg and Richter regarding the purchase of the merchandise division of McClurg. Although a formal business contract was later executed, the letter contained the essential terms of the purchase. Richter and his unnamed associates were to create Continental-Harrison, which would buy the division of McClurg; arrange for the sale of $500,000 worth of capital stock of the buyer; deliver to McClurg an additional $500,000 worth of fully paid stock; pay McClurg $600,000 in cash prior to the closing date and $100,000 thereafter; allow McClurg to nominate three people to the buyer's board of directors; compel the buyer to purchase a division of Luminator-Harrison Corporation; and establish a closing date between November 1 and December 15, 1965.

To meet these prerequisites, Richter caused Continental-Harrison to be incorporated in August, 1965; helped to elect three nominees of Weisman to Continental's board of directors; had Continental acquire Luminator-Harrison's assets; made Continental's necessary cash payments; directed Continental's secretary to issue 10,000 shares of Class A common stock, par value $100, by the December 3 closing date. One-half of the shares, fully paid, were given to McClurg; the remaining half were purchased by a few people, with Richter owning at least 25 percent of the outstanding stock.

Gowdy, then unemployed, interviewed with Richter for employment in late December, 1965, or early January, 1966. Based upon his years of experience in marketing and sales promotion, he hoped to join Continental. An agreement was worked out whereby Gowdy would purchase a substantial amount of shares of stock in Continental. In turn, Richter would hire Gowdy. A cashier's check for $20,000 was issued on January 14, 1966, naming as payee "Walter Richter C-H-A-C," and was given to Richter by Gowdy on January 16. The check identified Gowdy as the remitter. The check, introduced into evidence, bore on the reverse side the restrictive endorsement "For deposit only Walter Richter C-H." Richter testified that the initials referred to a bank account set up to act as a clearing house for funds used to purchase capital sock in Continental.

A letter signed by Richter and bearing the date January 17, 1966, was introduced into evidence. It contained directions to the corporate secretary to cancel an enclosed certificate for 200 shares of common stock, par value $100, listed in the name of Edward Lutz, and to issue a new certificate for 200 shares of the same stock to Howard and Suzanne Gowdy as joint tenants. The Gowdy certificate was issued, and Gowdy commenced work as a sales manager of a Continental subsidiary on January 17.

On May 11, 1966, Continental petitioned for bankruptcy and was placed in receivership. In 1966 Gowdy visited his attorney regarding a promissory note owed to him by Richter. On March 20, 1968, Gowdy notified Richter of his election to rescind the stock purchase, tendered the stock, and demanded repayment of the purchase price. A similar notice and tender were given to the other defendants on September 26 or 27, 1968. Mrs. Gowdy also made a tender of the stock at trial, but it was again rejected by the defendants.

At the conclusion of the trial, after receiving proposed findings of fact and conclusions of law, the trial court found in favor of the plaintiff and entered judgment against all four defendants in the amount of $28,500, consisting of the $20,000 purchase price, $6000 in accrued interest, and $2500 in attorneys' fees.

Defendants McClurg, Weisman, and Greenberg contend that the trial court erred in finding that the purchased stock had not been properly registered; in holding that the plaintiff had complied with the tender and notice provisions set forth in the Illinois Securities Act; in granting attorneys' fees to plaintiff; and in holding that the evidence sustained their substantive liability under the statute. Richter has filed a separate brief adopting the first three contentions of the other defendants, but does not contest his substantive liability. Richter additionally argues that he should escape any liability for selling unregistered securities because strict compliance with section 4G, one of the registration exemption provisions, is not required, and because the plaintiff should be estopped from rescinding the purchase.

Pursuant to section 13 of the Securities Act (Ill. Rev. Stat. 1967, ch. 121 1/2, par. 137.13 A & B), a purchaser may elect to rescind a sale of securities made in violation of the provisions of the securities law upon the giving of timely notice and upon the tendering back of the securities to certain designated persons. All securities except those exempt are required to be registered with the Secretary of State's office prior to being offered or sold in this state. (Ill. Rev. Stat. 1967, ch. 121 1/2, par. 137.5) Failure to comply with the requirement constitutes a violation of the Act. (Ill. Rev. Stat. 1967, ch. 121 1/2, par. 137.12 A & D) A defendant bears the burden of showing that an unregistered security qualifies as an exemption under the Act. Ill. Rev. Stat. 1967, ch. 121 1/2, par. 137.15A.

Defendants initially contend that the trial court erred in finding that the securities sold in the present case were not registered at the time of sale and were thus sold in violation of the Act.

Plaintiff's complaint alleged that the stock had not been registered at the time of the sale in violation of the Securities Act. Richter's answer admitted the averment. The other defendants framed their answers in the alternative, stating that they did not have sufficient knowledge to form a belief as to the truth of the allegation, but that "if a certificate was issued to plaintiff, it represented the transfer of all or part of a previously issued certificate that was owned by a person other than defendants [Weisman, McClurg, or Greenberg]."

• 1 An admission in an answer constitutes a judicial formal admission, conclusive as to the admitted fact on the person making it. Thus, Richter's specific admission is binding upon him. Coss v. Magdziasz (1965), 65 Ill. App.2d 40, 212 N.E.2d 717.

In evaluating the recitals in the answers of the other three defendants, we must determine if the answers fairly respond to the substance of the allegation denied. (Ill. Rev. Stat. 1967, ch. 110, par. 40(3).) The failure of a defendant to explicitly deny a specific allegation in the complaint will be considered a judicial admission and will dispense with the need of submitting proof on the issue. Continental Casualty Co. v. Fleming (1964), 46 Ill. App.2d 276, 197 N.E.2d 88.

• 2, 3 The second part of defendants' answers responds only to the question of who the seller was and fails to address itself to the charge that the stock was not registered at the time of sale. Since the evidence adduced at trial clearly showed that a certificate for 200 shares of stock had been issued to Mr. and Mrs. Gowdy for consideration, the failure of the defendants to explicitly deny the allegation that the stock was not lawfully registered at the time of sale appears to be a binding admission of that fact. Moreover, even if the answers were sufficient to create an issue of fact, defendants' position has no merit. Although plaintiff did not introduce direct proof that the stock sold was not registered at the time of sale, it is equally clear that defendants never disputed plaintiff's charge that the stock was non-registered. Defendants stipulated at trial that a report of sale had never been filed by anyone. The filing of a report of sale is one condition set out in section 4G of the Act to qualify an unregistered security as an exemption from the registration requirement. The defendants, in their proposed findings of fact, later reiterated their assertion that a report of sale had not been filed. Although defendants now characterize their statement in the proposed finding as an "informal suggestion," we perceive it as an admission (see Allen v. United States Fidelity & Guarantee Co. (1915), 269 Ill. 234, 109 N.E. 1035), since the purpose of proposed findings of fact is to enable the trial court to perceive and decide facts that are in issue. (Dendor v. Board of Fire & Police Commissioners (1973), 11 Ill. App.3d 582, 297 N.E.2d 316.) Furthermore, when specifying in their proposed conclusions of law the various elements plaintiff had to prove to prevail in this case, defendants totally omitted any mention of a violation of the Act. It seems clear that defendants conceded the fact that the stock was not registered at the time of sale.

Defendants next contend that the trial court erred in holding that the "purchaser" of the stock, for the purposes of making a tender of the stock and of supplying timely notice under the statute, was solely Mr. Gowdy. Defendants argue that the manifest weight of the evidence establishes Mrs. Gowdy as a joint purchaser with her husband, and hence a necessary party in the making of a tender and in the giving of timely notice. The record shows that Mr. Gowdy alone gave defendants notice of the rescission, and that Mr. Gowdy prior to trial, and Mrs. Gowdy during trial, made a tender of the stock to the defendants, although the parties disagree as to her capacity at the time she made the tender.

• 4 Richter's answer to the complaint admitted that the stock was sold to Mr. Gowdy. Since sale and purchase are complementary terms (see Ill. Rev. Stat. 1967, ch. 121 1/2, par. 137.2-5), we consider his answer a formal judicial admission uncontestable on review.

Since the other defendants denied all the charges contained in the purchaser allegation of the complaint, we must analyze the evidence offered at trial.

Mr. Gowdy, unemployed at the time, wrote Richter seeking to join Continental in a position commensurate with his experience. After the two men met, they agreed that Gowdy would be employed by Continental or one of its subsidiaries at an administrative or executive level. Gowdy, in turn, would purchase a substantial amount of stock. On January 14, 1966, Gowdy had a cashier's check drawn specifying "Walter Richter C-H-A-C" as payee, which was tendered to Richter on January 16. Gowdy was listed as remitter on the face of the check. The check was endorsed on the reverse "For deposit only Walter Richter C-H." The C-H account was set up by Richter upon the advice of his bank as a clearing house account for capital stock transactions involving Continental. On January 17, Richter directed the corporate secretary to cancel an outstanding certificate issued in the name of Edward Lutz and to issue a new one, pursuant to Gowdy's instructions, in the name of Mr. and Mrs. Gowdy as joint tenants with right of survivorship. At the same time, Gowdy began work as sales manager of Continental's subsidiary corporation.

Mrs. Gowdy testified that all the funds making up the purchase price were borrowed. The moneys were derived from three sources: her father, Mr. Gowdy's brother, and a bank. The loan from the bank was obtained by increasing the mortgage on the Gowdy residence, which was held in joint tenancy. She also testified that she had participated in raising the funds and that she considered herself to be a joint owner of the stock.

• 5 The trial court's finding as to the purchaser in a securities transaction will not be overturned on review unless contrary to the manifest weight of the evidence. (Frenzel v. Lonnquist Co. (1940), 304 Ill. App. 377, 26 N.E.2d 687.) Although the term "purchaser" is not defined in the statute, we think a proper definition is a party to a transaction wherein he ...

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